Tidewater Inc Q2 FY2023 Earnings Call

Thank you for joining us. My name is Ian, and I will be your conference operator today. I would like to welcome everyone to the Tidewater Inc. Q2 2023 Earnings Call. All lines have been muted to ensure no background noise. I will now pass the call to West Gotcher, Vice President of Finance and Investor Relations. You may begin.

Thank you, Ian. Good morning, everyone, and welcome to Tidewater's Q2 2023 Earnings Conference Call. I'm joined on the call this morning by our President and CEO, Quintin Kneen; 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. 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 8, 2023. Therefore, you're advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we'll present both GAAP and non-GAAP financial measures. 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 2023 Tidewater Earnings Conference Call. Before I hand it over to Piers and Sam to discuss our quarterly results, I want to briefly review our integration of the 37 high specification PSVs from Solstad Offshore, discuss the results from our recent warrant expiration, and reiterate our strategy on capital allocation. We finished acquiring the Solstad vessels on July 5, right after the second quarter ended. We believe this fleet will be a valuable addition to Tidewater and will generate significant value for our shareholders as the offshore market continues to improve. This acquisition differs from our last two as it is primarily an asset acquisition. Therefore, we needed to prepare our shore-based staff in advance of the closing to ensure a smooth transition of the vessels into our existing operations. The advantage of this type of acquisition is that we maintain full control over the incremental shore-based resources we integrate without resulting in layoffs or downsizing. However, the downside is that we must begin preparations much earlier and have a smaller margin for error since we transition assets from an existing operational framework and must integrate them into Tidewater’s systems over a few days. I’m happy to report that we have already transitioned five vessels in the first 35 days. We believe our transition processes are effective, and we plan to have all remaining vessels transferred by the fourth quarter. Integrations are essential for maintaining our scalable global infrastructure and minimizing our per-vessel overhead expenses, and we treat all of our integrations seriously. This integration will ramp up ahead of the closing, reaching a new steady state over approximately six months. About a week ago, we unintentionally became an equity issuer as warrants from our 2017 restructuring expired in the money. We raised $111 million and issued 1.9 million new shares, all of which are common shares with no Jones Act warrants. Now that we have sufficient U.S. ownership, there’s no need for us to retain Jones Act warrants. There are still some outstanding Jones Act warrants, and we are happy to convert them to common shares for anyone who holds them. Philosophically, I’m pleased that the former Tidewater equity holders received additional value from these warrants, but we wouldn’t have issued shares otherwise. As a result, we have a new $111 million to allocate in the best interests of our shareholders. Our first focus for capital allocation will be on value-accretive acquisitions similar to our recent ones that complement our global positions in large act PSVs and other less commoditized OSVs like large anchor handlers. We are also considering other offshore energy-related assets, but they must align well in terms of fit, price, diversification, etc. Strategically, we are currently underrepresented in the Far West Hemisphere, primarily the U.S. and Brazil, so acquisitions in those areas may be prioritized. However, we are excited about the potential for generating profits with our existing fleet of 223 vessels and do not necessarily need to pursue further acquisitions. If potential acquisitions arise at the right price, we can certainly enhance value. In the absence of value-accretive M&A, we would look for the best means to return cash to shareholders. We are currently generating more income on our cash than we have in a long time, but I prefer not to hold onto cash with its associated negative carry. Our secured bond currently prevents any capital returns until November 17 of this year, which is about three months away. Additionally, any capital returns must be considered only after we establish a suitable debt structure for our cyclical business, which involves a combination of long-dated staggered maturity, secured bond debt, and a sufficient revolver. I believe we can make further progress toward that objective in the upcoming quarters. Finally, we are filing an updated Form S-3 this week as our previous universal shelf has expired. This is a standard procedure for a well-known seasoned issuer like Tidewater, setting us up for any potential acquisition opportunities mentioned earlier. The second quarter showed continued positivity in the offshore vessel market. The most significant indicator of strength in our business, the average day rate, continued to rise during the second quarter, increasing by $1,400 per day sequentially, which is nearly a 10% increase. The average day rate has risen by roughly $5,500 per day since the recovery began at the end of 2021. Every region and vessel class saw day rate increases during the second quarter, except for our 8,000 to 16,000 BHP-class anchor handlers, which remained flat. For the second quarter, revenue grew about 11% to $215 million compared to $193 million in the first quarter. The average day rate increased approximately 10% sequentially, and our vessel level cash margin expanded by four percentage points to around 44%. Leading-edge day rates continued to improve during the second quarter, increasing 11% from the first quarter. We secured term contracts for 26 vessels during the second quarter. The average day rate for these contracts was about $23,500 per day with an average duration of around 6.5 months. This compares to approximately $21,000 per day with an average duration of 7.5 months in the first quarter. An 11% increase in leading-edge day rates is significant. Moreover, the composite average day rate of $23,500 is 46% higher than the average day rate for the second quarter. This growth potential reinforces our confidence in our revenue and gross margin guidance for the year and our optimistic outlook for 2024. The improvement in day rates gives us the confidence to maintain our 2023 annual guidance of $1 billion in revenue and $500 million in operating margin, despite the utilization impact in the second quarter. We expect Q3 revenue to rise by approximately $80 million compared to Q2 and foresee an additional $30 million increase in Q4. Both estimates include revenue from the newly acquired Solstad PSVs. To provide more context for our Q3 guidance, we currently have 87% of fleet capacity contracted, giving us 100% backlog coverage in relation to our revenue guidance. Within that backlog, we are assuming 84% utilization, which is a nice improvement. The downside risk involves potential revenue loss from a contracted vessel that is expected to achieve 84% utilization but may fall short due to reasons like being off-hire for repairs. In summary, we are pleased with the ongoing momentum in our regions and vessel classes during the second quarter, and we maintain a highly optimistic outlook for 2024 and beyond. Now, let me turn the call over to Piers for an overview of the global markets and our company’s performance within them.

Thank you, Quintin, and good morning, everyone. Before I focus on our area's performance, I want to talk a little about what we at Tidewater are seeing happening in the industry that gives us the necessary confidence in the long-term outlook for our industry. Our teams regionally all continue to see positive investment momentum in their respective offshore markets, driven by resilient long-cycle offshore developments, production capacity expansions, the return of global exploration and appraisal, and the recognition of natural gas as a critical fuel source for energy security and as part of the energy transition. Offshore markets remain strong, and the supply-demand outlook is very positive. Offshore vessel and rig demand is being bolstered by supportive energy prices, with operators seeking to reinvest profits into increasing oil and gas output. Overall, $68 billion of offshore oil and gas projects CapEx has been sanctioned in 2023 year-to-date, with outside research projecting $119 billion for the full year, the highest level since 2013. Furthermore, other research resources forecasted E&P vessel spending is expected to increase by 32% this year, with spending estimated to increase with a compound annual growth rate of 10% out to 2027. As evidence of some of this newfound long-term confidence in the market, BP has announced the revival of the huge offshore project, Kaskida, in the U.S. Gulf, which they abandoned in 2014, and they are now planning to revive the project, targeting FID in 2025 and First Oil in 2028. The reservoir is estimated to hold more than 4 billion barrels of oil. Rig rates continue to firm, with Clarksons Research reporting that their rig rate index is now up by 74% compared to the beginning of 2021, driven primarily by the floater sector, with one recent fixture agreed at $484,000 per day in June for a harsh environment semi heading for Australia, a further sign of tightness in the harsh floater sector amidst reduced supply and strong competition for harsh units globally. Additionally, various multiple industry outlets forecast that the floater market will hit 100% utilization next year and into 2025, and that the jack-up market will be at 98% utilization by 2025. All very positive indicators for the long-term health of the OSV space. To back up various recent outside research reports, a leading global offshore rig provider recently disclosed that they now intend to exercise the purchase options for their two floaters currently sitting in a yard in South Korea. As the company said it sees enough strong customer interest in their rigs based on their current market outlook, and that the expectation is that most, if not all, of the supply is stacked and new build drillships in the global fleet will be needed to meet growing growth and future demand. Lastly, on the demand side, Q2 reports from three leading EPC contractors reveal a significant milestone: that their combined backlog now surpasses the 2013 year-end record reported backlog, which also bodes well for the long-term demand of the industry, when many of these projects generally have a 3- to 5-year time frame before completion. In addition, as we have said many times on these calls, vessel supply is set to remain constrained for some time. According to leading industry research, 43% of the remaining laid-up vessels have been in lay-up for more than five years, with reactivation becoming increasingly time- and cost-intensive, and there is very little sign of any kind of new building activity on the horizon due to the challenges of securing finance, high new build pricing, uncertainties surrounding design and technology, and day rates still not returning to a level to support long-term new build economics. So overall, we remain very positive for the long-term health of the market and have started to see some significant movement from our customers when it comes to discussing contract terms. In particular, termination clauses, with some customers now willing to accept no cancellation for convenience clauses in return for longer-term contracts. Again, very positive momentum, we believe, for the industry. Moving on to our own fleet. And as mentioned by Quintin, we continue to see the increase in demand and shortness in supply impact rates positively on the upside. And even though in Q2, we saw a slight tick down in utilization compared to Q1, the team still managed to push our fleet composite day rate up by over $1,400 per day compared to the prior quarter. Working through our various regions and starting with Europe, coming out of Q1, whilst the U.K. market was slightly sluggish in Q2, we continued to see strong demand in both Norway and the net PSVs, which offset any sluggishness in the U.K. The team improved our composite fleet rates compared to Q1 2023 from $15,669 per day to $18,999 per day, a jump of $3,321 per day across the whole region. In the Med, we also saw leading-edge day rates for our larger class of vessels reach in excess of $32,000 per day. On the AHTS side, we mobilized back into the region one of our larger AHTSs after she had finished project work in Africa, with the intention to have two large AHTS in the region to take advantage of the traditionally strong summer season in the North Sea. Rates have remained robust in the $30,000 to $40,000 per day range, and the expectation still remains that demand will pick up in Q3. Moving to Africa, we again continue to see rising demand across the whole continent, with particular focus in Angola, Namibia, Congo, and Senegal, and have recently seen Total come out to tender for two 10-year floating rig requirements to support their ongoing plans in the region. In Q2 2023, the composite fleet rate improved by $1,422 per day from $13,047 per day in Q1 2023, up to $14,469 per day, with most of the day rate improvement in the quarter again coming from our larger 16,000 BHP-class anchor handlers and plus-900 square meter class of PSV. We also had a number of large and medium PSVs rolling off legacy below-market contracts and into new contracts with leading-edge day rates in excess of $34,000 per day levels. In the first half of the year, we also made the decision to mobilize several of our smaller 4,000 to 8,000 BHP-class of AHTSs out of the region to the Middle East to support our operations in Saudi Arabia, where we'll be able to achieve much better utilization and margin for this class of vessels going forward. During the quarter, this relocation of vessels had a negative impact on our overall utilization numbers, but we believe it is the right time to take some short-term pain for long-term gain. To be clear, we still remain very positive for the Africa region going forward. And whilst our main focus will primarily be in growing our large PSV and AHTS fleet in the region to continue to be the big boat supplier of first choice on the continent. We did also commit to building four new Alicats to provide crude transfer services for one of our customers in the region against non-transport for convenience contracts. In the Middle East, Saudi Arabia remains the dominant country in the region as well as one of our key areas of focus for the fleet. As I just mentioned, we made the decision in Q2 to mobilize a number of our smaller AHTSs and smaller PSVs from other areas to take advantage of not just the improving day rates in the country for these class of vessels but, as importantly, the consistent utilization you are able to achieve in the Kingdom compared to other regions. Jack-up rig demand in the Middle East remains robust and currently stands at a record 148 units, with demand in the Middle East projected to grow by an additional 8% for the rest of 2023. In one of our most challenging regions competition-wise, the team did a fantastic job pushing rates and increased our total composite fleet rate from $770 per day to $9,679 per day in Q1 2023 to $10,449 per day in Q2 2023. In the Americas, as mentioned last quarter, we saw a lot of demand in Brazil in Q1 from Petrobras, with the NOC reported to have awarded up to 20 new PSV contracts. In Q2, market sources reported that rates being offered for this tender were all in excess of $40,000 per day levels for larger PSVs. In addition, Petrobras is expected to come out with a long-term tender for large AHTS shortly, which is expected to consume additional supply from outside of the country when the contracts start in Q1 and Q2 2024. Elsewhere in the region, Guyana and Suriname continue to see a strong first half of the year. We also started to see the big boat market pick up steam in the U.S. Gulf of Mexico during the quarter. In Q2 2023, our Americas fleet continued to perform strongly, but we didn't have a huge uptick in rates as we saw in some other areas, as we didn't have a large rollover of new contracts in the quarter as we continued working on contracts in the previous quarter. However, the team was still able to push the composite fleet rates by $475 per day from $19,794 per day in Q1 2023 up to $20,269 per day in Q2 2023. The majority of the uptick coming in the large PSV class, where we also managed to achieve leading-edge day rates in excess of $40,000 per day. Lastly, in Asia Pacific, Malaysia, Taiwan, and Australia continue to be the key drivers of demand in the region in Q2 2023, and we expect those countries to drive demand through the rest of the year and into 2024. We did move one of our smaller AHTS in the Middle East for the same reasons as previously mentioned, with the focus for the region going forward being on the bigger boat market, where we are best able to support our customers by being the supplier of choice for large AHTSs and large PSVs. In Q2 2023, the Asia Pacific team continued to sustain impressive rates across the region and even managed to increase the composite rates in the region by $668 per day from $23,582 per day in Q1 2023 up to $24,350 per day in Q2 2023. All in all, a very impressive performance for the quarter and the first half of the year. Overall, as mentioned by Quintin, we are very pleased with how the market has continued to move in the right direction throughout the year, and that we expect that positive momentum to continue into subsequent quarters and beyond, with all signs being that we do not see any significant slowdown in demand in any of the regions in which we operate. And with that, I'll hand over to Sam. Thank you.

Thank you, Piers, and good morning, everyone. At this time, as in prior quarters, I would like to take you through our financial results, and I will focus primarily on the quarter-to-quarter results of the second quarter of 2023 compared to the first quarter of 2023. As noted in our press release filed yesterday, we reported net income of $22.6 million for the second quarter or $0.43 per share on revenue of $250 million compared to $10.7 million of net income or $0.21 per share in the first quarter on $193.1 million in revenue. Active utilization decreased slightly from 80.6% in Q1 to 79.4% in the current quarter. The decrease is due primarily to higher drydock days and higher mobilization days as we mobilized nine vessels to different regions in the quarter. Average day rates increased by 9.7% from $14,624 per day in the first quarter to $16,042 per day in the second quarter, which was the main driver for the increase in revenue. Vessel margin in Q2 was $92.1 million compared to $75.7 million in Q1, and vessel margin percentage increased to 43.8% from 39.6% in Q1. Adjusted EBITDA was $72 million in Q2 compared to $59.1 million in Q1. Vessel operating costs for the quarter were $118.3 million compared to $115.5 million in Q1. In the quarter, we saw an increase in crew salaries and travel expenses and vessel supply expenses related to the reactivation of a couple of vessels. In addition, as mentioned previously, we mobilized nine vessels into different regions and incurred additional drydock days in the quarter that added to the increase in operating costs, mainly due to the fuel consumed. Our vessel operating cost per day was relatively flat quarter-over-quarter at about $71.50 per day. We estimate that fuel costs related to mobilizations and a couple of one-time charges in the quarter affected our operating costs by about $250 per day. As we look to the remainder of the year, based on our most recent forecast and with the addition of the newly acquired 37 Solstad vessels, we estimate total 2023 revenues to be approximately $1.03 billion and vessel operating margin to be approximately $500 million. In the quarter, we sold three older noncore vessels, one from our assets held for sale and two from the active fleet for net proceeds of $2.9 million and reported a net gain of $1.4 million on the sale of these vessels. We generated operating income of $38.9 million for the second quarter of 2023 compared to $24.5 million in Q1. The increase is due primarily to the higher revenue. G&A cost for the quarter was $26 million, $2.5 million higher than Q1. G&A for the second quarter included $2.4 million in bad debt expense related to a customer's receivable balance that was determined to be uncollectible. In addition, we also incurred $1.2 million in transaction expenses related to the Solstad vessel acquisition. We expect our total G&A costs for 2023 to be approximately $97 million, which includes $6.2 million of transaction costs related to the Solstad vessel acquisition and the $2.4 million bad debt expense mentioned previously. Excluding these items, we anticipate our annual normal G&A run rate to be about $89 million, which includes additional costs added as part of the Solstad transaction. In the quarter, we incurred $21.4 million in deferred drydock cost compared to $31.1 million in Q1. We incurred 823 drydock days, which affected utilization by 5%. With the addition of the Solstad vessels, we now estimate our drydock costs for the full year 2023 to be about $87 million, which includes $8 million related to the Solstad vessels. In Q2, we also incurred $6.4 million in capital expenditures related to IT upgrades and vessel modifications. Additionally, we incurred $2.5 million related to down payments on four new Alicats. For the full year 2023, we expect to incur approximately $28 million in capital expenditures, $5 million of which has been reimbursed by our customers. We generated $11.3 million of free cash flow this quarter. Cash flow in Q2 was affected primarily by higher drydock and CapEx expenditures; we also paid approximately $10 million in taxes. Working capital increased by almost $23 million for the quarter. Even though we do expect our investment in working capital to grow with the addition of Solstad vessels and as revenue increases, we will continue to manage this investment tightly. As anticipated, we did see a significant spend in CapEx and drydocks this quarter. However, we expect the cash flow performance to significantly improve in Q3, with additional improvements in Q4 as the business continues to accelerate. In Q4 of 2019, we began reclassifying vessels on our balance sheet from property and equipment to assets held for sale. We have since run 88 vessels through this program. At the end of Q2 2023, we had two vessels remaining in assets held for sale at a value of about $600,000. During the second quarter, as mentioned previously, we sold one vessel from the assets held for sale for proceeds of $500,000. On July 5, we completed the acquisition of the 37 platform and supply vessels from Solstad for $580 million. We financed the acquisition through a combination of net proceeds from a $250 million five-year fixed-rate unsecured Nordic bond, a new $325 million three-year sulfur-linked floating-rate amortizing secured senior bank term, together with $18.5 million in cash. More details of the financing are available in our recently filed Form 10-Q. We're very pleased with the acquisition, and we appreciate the support we received from the credit markets. We look forward to integrating the 37 vessels into our operational management and anticipate the completion by the fourth quarter. I would now like to focus on the performance of the regions. Our Americas region reported operating profit of $6.2 million for the quarter compared to operating profit of $8 million in Q1 2023. Vessel operating margin increased from 40.7% in Q1 to 41.2%. The region reported revenue of $50.4 million in Q2 compared to $47.7 million in Q1. The region operated 32 active vessels in the quarter, an increase of one vessel from Q1. Active utilization for the quarter was 85.4%, slightly higher than 85.2% in Q1. Day rates increased 2.4% to $20,269 from $19,794 per day in Q1. The decline in operating income was due primarily to increased reactivation expenses and the $2.4 million bad debt charge taken in the quarter. For the second quarter, the Asia Pacific region reported an operating profit of $7 million compared to an operating profit of $5.6 million in Q1. Vessel operating margin increased from 43.3% in Q1 to 47%. The region reported revenue of $22.6 million in the second quarter compared to $22 million in the prior quarter. The region operated 14 active vessels, which was up one vessel on average compared to Q1. Active utilization decreased to 72.4% in the quarter compared to 77.8% in Q1. However, day rates increased by 2.8% from $23,582 per day in Q1 compared to $24,250 per day in Q2. The higher operating income is due to the increase in revenue, coupled with decreases in operating and G&A expenses. For the second quarter, the Middle East region reported an operating loss of $1.7 million compared to an operating loss of $344,000 in Q1. Vessel operating margin decreased from 25% to 22.7%. The region reported revenue of $31.9 million in the second quarter compared to $30.8 million in the prior quarter. The region operated 44 vessels, an increase of one vessel from Q1. Active utilization decreased from 82.5% in the first quarter to 76% in Q2, due mainly to higher mobilization days. Day rates increased from $9,679 per day in Q1 to $10,449 per day in Q2. The region incurred over 500 mobilization days in the quarter, which impacted utilization substantially, as four vessels were transferred into the region. The decrease in operating income was due primarily to the increase in operating expenses, in particular, higher fuel expense, resulting from the mobilizations into the area. Our Europe and Mediterranean region reported operating profit of $8.3 million in Q2, a nice increase from Q1, where the region reported operating profit of $2 million. Vessel operating margin increased from 36.7% to 45.8%. Revenue increased 26% to $39.3 million in Q2 compared to $31.3 million in Q1. The region operated 26 vessels in the quarter, one less than Q1. Active utilization increased to 85.7% compared to 83.4% in Q1. The increase in utilization was primarily due to lower drydock days in Q1 and the increase in activity as the seasonality impact reduced. In addition, day rates jumped 21.2% to $18,990 per day compared to $15,669 per day in Q1. The increase in operating income for the quarter was mainly driven by the increase in revenue, offset by higher operating costs due to higher R&M and higher supplies and consumable expenses. Our West Africa region reported operating profit of $25.5 million in Q2 compared to operating profit of $17.2 million in Q1. Vessel operating margin increased from 46.4% to 53.6%. The market in this area remains strong. Revenue for Q1 was $66.2 million compared to $59.5 million in Q1. The region operated 65 vessels on average in Q2, one less than in Q1. Active utilization increased to 77.8% in Q2 from 76.6% in Q1. Day rates continued to increase as we saw a 10.9% increase to $14,469 per day in Q2. The increase in operating income from Q1 resulted mainly from the higher revenue, coupled with a decrease in vessel operating expenses. In summary, we are pleased with our Q2 results. In the quarter, we repositioned nine vessels to different regions and had a high number of anticipated drydock days that affected our overall results. However, this will have a positive impact on our results in the future. We are encouraged to see continued increases in revenue throughout the year driven by higher day rates. During 2022, we reactivated many of our previously stacked legacy Tidewater vessels, acquired 49 vessels with the Swire transaction. In July 2023, we completed the purchase of 37 Solstad vessels, all of which will now put us in a stronger position to take advantage of the continued upturn in the industry. We remain encouraged by the leading indicators we see for the remainder of 2023 and beyond. With that, I'll turn it over back over to Quintin.

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

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

About one year. For the legacy Tidewater fleet, yes.

And when you consider the incremental tightening in the market based on activity and spending, are your customers expressing any concerns about that trend? As their spending plans improve, they likely observe the same trends we do and may worry about vessel availability. I'm interested in how those discussions are unfolding. Also, your actual duration decreased by a month this quarter compared to what you booked last quarter. Are they trying to secure longer-duration contracts, and how is that conversation progressing?

Yes. In fact, Piers is currently in Brazil. I'll pass it over to him shortly. I would mention that the period of surprise regarding prices that we experienced in 2022 is behind us. Now, everyone understands that rates are increasing and are concerned about scarcity. This scarcity is a significant issue for them. As a result, those who are actively engaged in drilling campaigns are more apprehensive about availability. We are beginning to see them attempting to secure longer booking periods. While we are still opting for shorter terms, Piers is the person in our organization who is closest to this situation. So, let me invite him to share his insights.

Yes. Thanks, Quintin. Hi, Jim. Strategically, we had a plan to go short to help us transition from several poor legacy contracts. Part of this involves addressing the cancellation clauses that oil companies imposed on us during the downturn. We are investing a significant amount of time pushing back on these clauses and encouraging customers to commit fully to their contracts, whether they are for one, two, or three years. We have seen some positive momentum this year, with customers starting to accept these contract terms again. While this process doesn't happen quickly, we are beginning to achieve success with customers who understand that if they want a three-year contract, they need to provide a commitment to support it. This shift is occurring because they are concerned about the scarcity of vessels. Although it takes time, we are definitely observing movement in this direction from our customer base.

Yes. That makes sense and sounds good from your end. And Quintin, on the relocation of vessels out of certain markets into the Middle East, obviously, there's some near-term cost impacts and utilization impacts. Just maybe a little color on how much further does that still drag some in Q3. And then how long before you think that starts to benefit you from the steady utilization and hopefully better rates kind of perspective?

Yes. An underlying theme during the quarter and the first six months is that the last boats to be utilized are typically the smaller and lower-specification ones, which are suitable for the Middle East. However, deploying them there requires a complete Saudization process, incurring initial costs. While we successfully reactivated these boats in the first half of the year, most of the impact was felt in Q2, with only a minor portion expected in Q3, which is not significant and fully accounted for in our guidance. I believe the surge in reactivation and the global adjustment are mostly behind us now.

Great. I will turn it over for someone else. Thanks.

I was hoping to get more details about the contracted fleet. You mentioned that about 87% of the fleet is contracted. My questions are whether this is due to vessels rolling off contracts and then entering into longer contracts, or if there’s a natural portion of our fleet that will just be operating in the spot market. Additionally, could you provide insight into where those spot vessels are and how those markets are performing?

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

Thank you, Quintin. Hi, Greg. You're correct in noting there's an element of spot availability, particularly in the North Sea where there's always some level of spot exposure, especially with larger anchor handlers as we move into the second half of the year. The North Sea market is performing well, and it remains positive. The good news from the Solstad transaction is that we hold the largest share in the PSV segment of that market, and our competitors seem to be maintaining their rates as well, which is contributing to a certain stability in the North Sea spot market. Additionally, we have several contracts ending in Q3 and Q4 in Africa, but there is positive momentum there as well. Overall, we are quite active globally, with a small amount of spot exposure in Asia, but generally, everything else is functioning well, with most of the spot exposure concentrated in the North Sea.

I would like to discuss the Solstad fleet. You mentioned the integration of five vessels. As we consider the integration of the rest of the fleet, can you provide an estimate of the costs on a per vessel basis? You hinted that it might be around a couple of hundred thousand dollars to integrate each one. Additionally, regarding the vessels not yet integrated, I understand there's a significant presence in the North Sea, but some are located in Brazil and West Africa. Should we expect these vessels to remain where they are? You mentioned your activities in Brazil; are you already exploring ways to enhance our position there? I'm interested in your thoughts on this, especially in light of the recent decision to reposition vessels to the Middle East.

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

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

That's correct. We're anticipating G&A to go up about $5 million for a full year. So ...

The additional shore-based facilities are important, but the actual movement of the vessels is mainly a careful planning process without significant costs involved.

Not an intense cost. That's correct.

What is the outlook for those vessels, considering when we acquired them and their location? Is it too early to tell, or should we be thinking about it?

Right now, most of the fleet is under contract, which has its pros and cons because I would like to transition them to new contracts a bit quicker. Over the next year, you can expect them to continue working in their current locations. The largest group is in the North Sea, but we also have a few in Brazil, a few in Australia, and one or two in West Africa. I'm optimistic because these vessels are moving to new contracts that are better than we anticipated. From a merger analysis perspective, I'm happy about that. My concern is that the U.K. sector may slow down over the next couple of years. If that happens, I expect to shift them to the Mediterranean, which has been performing well, as well as West Africa. I don't foresee exiting Brazil at this time, although it remains a challenging market for international operators. I believe there is a real opportunity in Brazil for foreign tonnage, not just Brazilian flag tonnage.

Hopefully, you guys can hear me. I actually wanted to revert a bit to some of the themes that Greg touched upon in relation to contracted capacity. You've given us the numbers for the third quarter. Are you able to give us some color on what's happening in the fourth quarter and also in 2024? And I'd be interested in both what you booked of revenue going forward, but also what's left in terms of free capacity to play the markets.

Sure. As we look at each quarter, we have a bit more capacity to fill. Currently, we are about 85% filled for the fourth quarter. We will focus on filling that remaining capacity to reach the same level we discussed for Q3, which is 100%. I will hold off on discussing 2024 until we go over it, but the trend will be similar as we progress through the quarters.

In terms of your strategy for Q2, you mentioned holding back on capacity to secure longer-term work with extended rates. Are you now considering shifting from that short strategy to a longer one more extensively, or is it more suitable to focus on specific subsegments of your assets? Any insights you can provide would help us understand cash flow visibility better. I believe there might have been some misunderstandings, but if your perspective on this has changed, that information would be valuable.

No. My attitude really hasn't changed. I'm still very optimistic in the acceleration of day rates globally. And I really see nothing holding it back. There's no incremental supply of any magnitude coming in from anywhere, and activity levels are continuing to increase. So generally, I'm still going short. Now we've been going short for so long that we're actually depleting a lot of our coverage. So we may add some longer-term contracts just to balance out the book, if you will. Because there's always a meaningful piece of long-term contracts. If you can get the right terms, if you can get the right price escalations and so forth. But if I had my druthers, I'd just jam it on the spot market. But let me hand it over to Piers, and he's got to live with it. So I'll ask him to comment as well.

I think I mentioned earlier that we are still focused on a relatively short-term strategy. However, as Quintin just indicated, we are dedicating some time to secure customer commitments to long-term contracts. If customers are willing to commit to a solid, non-cancelable three-year or five-year contract with favorable terms, we would certainly consider adding that to our fleet. Nonetheless, I don’t anticipate any shifts in our strategy in the short to medium term. We remain optimistic about the long-term prospects for this market, and we see more opportunities for growth as we move forward.

Yes. I would like to add one more point regarding our approach in the spot market, which remains unchanged. If we decide to secure additional contract coverage, as Piers mentioned, it will be based on contract terms that we believe can be maintained over a 3-, 4-, or 5-year period.

Perfect. And just a final follow-up on that. In some other subsegments like the rig space, we have observed over the last few months that the lead time to start contracts has increased for these long-term agreements. There are distinct dynamics in these two markets. Regarding your discussions with clients, are they not only open to offering term contracts, but how far in advance are they planning for their OSV needs? And how has that changed over the past 12 months?

Hey Piers, do you want to take that one?

Yes, it always surprises me that customers aren't more organized when it comes to booking the PSVs and anchor handlers. However, most customers still tend to leave their bookings quite late. Even though they might have a long lead time for a rig, we aren't seeing tenders that are three months out, except perhaps from Petrobras; some NOCs do plan further ahead than the IOCs. Their lead times typically range from two to six months before tenders are issued. In some instances, we have customers expecting assets to be available within a month, which often leads to disappointment. So, we haven't specifically targeted rig contracts yet, but that might change in the coming months. Customers are definitely looking to commit to longer-term contracts and better terms when they do come out, indicating that some progress is being made.

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

There are no further questions at this time. I would like to hand the call back over to Quintin Kneen for closing remarks.

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

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