Earnings Call
Tidewater Inc (TDW)
Earnings Call Transcript - TDW Q2 2025
Operator, Operator
Thank you for standing by. My name is Ginnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Second Quarter 2025 Earnings Call. I would now like to turn the call over to West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations. Please go ahead.
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Thank you, Ginnie. Good morning, everyone and welcome to Tidewater's Second Quarter 2025 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 Operating Officer, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and referring to our plans and expectations. The risks and uncertainties and other factors may cause the company's actual performance to be materially different from that stated or implied by any comments that we're making during this conference call. Please refer to our most recent Form 10-K and Form 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, 2025. 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 in our earnings release located on our website at tdw.com. And now, with that, I'll turn the call over to Quintin.
Quintin V. Kneen, President and CEO
Thank you, West. Good morning, everyone, and welcome to Tidewater's Second Quarter 2025 Earnings Conference Call. Before beginning my prepared remarks, I'd like to first congratulate Piers Middleton on his recent appointment to Chief Operating Officer. Piers has over 30 years of experience in the industry and has been instrumental in the success that Tidewater has enjoyed over the past 4 years, and he will now be responsible for all of Tidewater's vessel operations in addition to the Chief Commercial Officer responsibilities he has held for the past 4 years. I'll start on today's prepared remarks by providing some highlights of the second quarter, discuss our recent balance sheet refinancing, update you on our share repurchase program and our current view on capital allocation, discuss the offshore vessel market and lastly, provide an update on the state of vessel supply. West will then provide some additional detail on our financial outlook and our new capital structure and share repurchase program. Piers will give an overview of the global market, and Sam will discuss our consolidated financial results. Second quarter revenue and gross margin nicely exceeded our expectations. Revenue came in at $341.4 million due primarily to a higher-than-expected average day rate and slightly better-than-anticipated utilization. Gross margin came in at over 50% for the third consecutive quarter. Day rates outperformed our expectations by more than $1,300 per day, setting a new quarterly day rate record at $23,166. The primary factor driving the increase in average day rate was the benefit of our fleet rolling on to higher leading-edge day rate contracts, bolstered by foreign exchange rates that largely strengthened against the dollar during the quarter. Additionally, our uptime performance continued to outperform our expectations as our vessels continue to benefit from substantial dry dock and maintenance investments we've made over the past few years. As a result of the higher-than-expected printed day rate for the quarter, along with improved uptime performance of our vessels, our gross margin of 50.1% came in well above our expectation of 44% provided on last quarter's call. Continued uptime performance in the quarter helped drive the gross margin because not only do we benefit from the incremental revenue associated with the vessel working, but we also avoid the expense of the repair itself, and we avoid the fuel expense associated with the operation of the vessel while it is on hire. During the second quarter, we generated $98 million of free cash flow, the second highest quarterly free cash flow figure since the offshore recovery began, up slightly from last quarter, bringing the first half of 2025 total free cash flow to over $192 million. In early July, we closed on a $650 million U.S. unsecured bond that refinanced the vast majority of our previously outstanding debt instruments, namely our two Nordic bonds and our term loan facility. We are very pleased to have consummated this refinancing, achieving our long-discussed goal of establishing a long-term unsecured debt capital structure more appropriate for the cyclical business in which we operate. Alongside the new bond, we put in place a $250 million revolving credit facility that provides us with a significant amount of financial flexibility. Importantly, given the liquidity enhancement of the revolving credit facility, we are now in a position to operate the business with less cash on the balance sheet as we now have an alternative source of liquidity besides cash on hand. West will provide more details next, but another important feature of our new debt capital structure is that it allows for a substantially increased capacity for shareholder returns. Our confidence in the long-term cash flow generation capability of the business is such that we are pleased to announce that our Board of Directors has approved a $500 million share repurchase program which equates to over 20% of the company's closing market capitalization as of yesterday. I'd like to discuss our share repurchase philosophy a bit further given the new capacity we have available to us and the size of the new program. Over the past 1.5 years or so under our prior debt documents, we were somewhat constrained in our capacity to repurchase shares. As such, we approached the share repurchase program on a quarter-by-quarter basis, updating our share repurchase capacity and for the most part, rapidly executing on our available capacity each quarter to ensure we maximize the share repurchase capacity available to us, particularly during those times when we saw a more pronounced dislocation in the stock price. Because we have previously executed our program in full each quarter, I don't want to leave you with the impression that we will execute all of the $500 million this quarter. We see this new program as a long-term repurchase program. Given our current cash flow on hand and our future quarterly cash flow generation, we can easily execute on this program over the next year or so and maintain a net debt-to-EBITDA ratio well below 1x. We won't be utilizing our revolving credit facility to repurchase shares and our capital allocation philosophy still prioritizes acquisitions over repurchases when such acquisitions add more value to our equity holders. Just to wrap up on the prior repurchase program, as previously announced, during the second quarter, we fully utilized the remaining capacity under our prior share repurchase program, repurchasing 1.4 million shares at an average price of $36.80 per share, totaling $50.8 million of shares repurchased in the second quarter. As it relates to capital allocation priorities, we remain committed to pursuing M&A opportunities, and this is still the preferred direction for us to allocate capital. As excited as we are to announce a new share repurchase program, we are optimistic that we can consummate more M&A transactions. Fortunately, the long-term cash flow outlook for the business is such that we can likely execute on both acquisitions and share repurchases, but the right, value-accretive acquisitions can provide benefits in excess of what a share repurchase alone can achieve, and we believe there are such opportunities in the market today. We remain open to a transaction using stock, cash or a combination of both although our view of the intrinsic value of our shares will influence how we employ stock as consideration. We will contemplate additional balance sheet leverage for the right acquisition, provided that we have confidence that the near-term cash flows provide the ability to quickly deleverage back to below 1x net debt to EBITDA, very similar and consistent with what we have done in our prior acquisitions. Shifting gears a bit, I'd like to discuss our view on the current offshore vessel market and how we see the market evolving over the coming months and quarters. West and Piers will provide more commentary shortly, but I think it's worth providing some context on our view of the market outlook today. Coming into 2025, uncertainty around offshore activity, particularly in the first half of the year was the prevailing theme with drilling activity poised to rebound in the back half of the year. Recent macroeconomic and geopolitical events seem to be extending that period of uncertainty, including for offshore vessels. We are in the fortunate position of benefiting from operations in almost every geographical location around the world and from a wide variety of offshore end markets, including production, subsea offshore construction and drilling and we remain confident in the fundamentals across each of these service lines. That said, the near term, specifically in the next quarter or two appears to be a bit softer than we originally expected, offsetting the fact that the last two quarters were much stronger than we originally anticipated. We remain unaware of any project cancellations and customer conversations remain constructive. But nonetheless, we seem to be in a period that can be characterized as lacking any sense of urgency related to commencing committed capital expenditures. Fortunately, subsea and production-related activity remains robust and is helping to mitigate the near-term activity softness in the drilling market. When vessel supply is as tight as it is, marginal improvements in drilling have an outsized impact on our ability to push up day rates across all of our service lines. The current level of subsea and production activity is strong, but it isn't quite sufficient to put the same strain on existing vessel supply that is needed to meaningfully push up day rates, but it has been enough to hold leading-edge day rates at their current levels. The continued expansion of subsea and production-related work provides a higher baseline demand, which reduces the number of vessels available to satisfy the increase in drilling activity we see shaping up nicely in 2026, which would then provide that much more of a strain on vessel supply as drilling activity picks up and therefore, increase our ability to once again aggressively push day rates higher. The vessel supply outlook remains essentially unchanged from the prior quarters and really over the past years, nothing has changed. And our understanding of new build conversations globally points to very limited activity. We're not aware of any new build announcements during 2025, the number of new builds on order, representing less than 3% of the global fleet are expected to deliver in late 2026 at the earliest likely into 2027 into 2028. We remain of the view that new build capacity won't sufficiently replace vessels expected to attrition from the global fleet during the same time frame. As such, we still view vessel supply limitations as a tailwind over the coming years as subsea and production markets structurally grow and as drilling activity increases. We watch new build activity very closely, and we will continue to do so, but believe that current shipyard capacity, prevailing global day rates and contractual trends, the stage of the vessel financing markets as well as vessel technological obsolescence considerations make any large-scale new building programs unlikely. In summary, we are pleased with the strong first half of the year and remain confident in our full-year expectations. We are now better positioned than we ever have been since the offshore recovery began with our new debt capital structure that has added flexibility to capitalize on value-accretive acquisitions and share repurchases. We remain confident in a robust free cash flow outlook, and we look forward to deploying this cash in the most value-accretive manner for our shareholders. And with that, let me turn the call back over to West for additional commentary and our financial outlook.
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Thank you, Quintin. Expanding on our recent debt refinancing. Subsequent to the quarter end, in early July, we closed on our inaugural U.S. high-yield bond issuance, issuing a 5-year $650 million unsecured bond with a coupon of 9.125%. The net proceeds of the issuance went to the redemption of our two previously outstanding Nordic secured and unsecured bonds as well as the previously outstanding term loan facility. Alongside the new unsecured bond issuance, we entered into a $250 million revolving credit facility with a syndicate of 9 banks. The completed refinancing marks an important milestone on the continued evolution of Tidewater. The new bond represents the first issue into the U.S. high-yield markets in the 65-year-plus history of the company and establishes a debt capital structure that is well-suited for our business, extending maturities out 5 years and providing substantial financial flexibility via the new revolving credit facility. Pro forma for the refinancing, Tidewater has liquidity north of $600 million at the end of Q2. Further, given the new liquidity enhancement via the revolving credit facility, we are now comfortable to reduce the amount of cash held on the balance sheet as that was previously our only source of liquidity. Importantly, the new bonds and revolving credit facility provide substantial flexibility as it relates to M&A and shareholder distributions. From an M&A perspective, we are unlimited in our ability to incur additional unsecured debt or assume debt related with an M&A transaction up to certain credit metrics, all of which were well below today's. From a shareholder return perspective, our new debt instruments similarly provide for unlimited ability to return capital, so long as we meet certain leverage metrics. Under the bonds, we are unlimited in our ability to return capital to shareholders, provided our net leverage ratio, defined as net debt divided by EBITDA, pro forma for a given return of capital is less than 1.25x. Similarly, our revolving credit facility allows for unlimited returns to shareholders, provided our net leverage ratio does not exceed 1x. Under the revolving credit facility metric, to the extent that we exceed 1x net leverage, we still retain the flexibility to continue returns to shareholders, provided the free cash flow generation is in excess of cumulative returns to shareholders. More broadly, our approach to leverage has not changed. We remain firmly rooted in our view of maintaining a leverage profile that when combined with our cash flow outlook provides us with the path to return to net debt zero within about 6 quarters. Our leverage philosophy matches up nicely with the shareholder return covenants and our new debt capital structure as we feel comfortable that the latitude provided is consistent with our approach to managing our leverage profile and provides substantial capacity to pursue shareholder returns. As such, we are excited to announce the $500 million share repurchase program. Given our current leverage profile, current cash on balance sheet and our outlook for cash flows, we believe this program is consistent with our philosophical approach to leverage and within the limitations set forth in our new debt instruments. As Quintin discussed, while our philosophy around share repurchases and capital allocation remain consistent, our approach to our share repurchase program will evolve given the new long-term capital structure and more permissive debt instruments. We will remain opportunistic and look to take advantage of inefficiencies we see in the market, but the pacing of the program could take a different shape than what we've exhibited in the past, particularly to the extent M&A transactions become actionable that require a component of cash consideration. Having said that, we remain confident that the longer-term cash flow outlook for the business supports both M&A and returning capital to shareholders. Turning to our leading-edge day rates, I will reference the data that was posted in our investor materials yesterday. Across the fleet, our weighted average leading-edge day rate was consistent from the first quarter into the second quarter. For our largest class of PSVs, we saw a nice pickup in day rates from the previous quarter due to strength in the Mediterranean, the Caribbean and the U.S., offset by lower day rate regions such as the U.K. and Mexico. Similarly, in our medium-sized class of PSVs, we saw particular strength in Brazil, Australia and the Caribbean, offset by lower day rate regions in the U.K. and the Middle East. For our largest classes of AHTS vessels, strength in the Caribbean helped push day rates. We entered into 15 term contracts during the second quarter with an average duration of 9 months as we look to a strengthening market as we progress into 2026. Looking to full year 2025, we are reiterating our revenue guidance of $1.32 billion to $1.38 billion and a full year gross margin range of 48% to 50%. We now anticipate Q3 revenue to decline by about 4% sequentially. Although we do expect utilization to improve sequentially, more near-term softness than anticipated is meeting our previously expected utilization improvement. In addition, we see a modest softening in day rates in the North Sea and West Africa, ahead of drilling activity demand improvements in 2026. We anticipate a Q3 gross margin of 45%. The sequential decline is due to the fall-through on lower revenue as well as higher costs associated with fuel expense related to idle days and repair and maintenance expense associated with vessels down for repair. As we progress into the end of the year, we anticipate utilization to improve sequentially from the third quarter into the fourth quarter due to dry dock days declining by about half, representing about 3 percentage points of utilization improvement. We expect margins to improve in the fourth quarter due to revenue associated with the reduction in dry dock days and associated reduction of fuel and repair and maintenance expense spend during the dry docks. The midpoint of our revenue guidance range is approximately 93% supported by first half revenue plus firm backlog and options for the remainder of the year. Our firm backlog and options represent $585 million of revenue for the remainder of 2025. Approximately 73% of available days for the remainder of the year are captured in firm backlog and options with our larger classes of vessels retaining slightly more availability to pursue incremental work compared to our smaller vessel classes. The bigger risk to our backlog revenue are anticipated downtime due to unplanned maintenance and incremental time spent on dry docks. With that, I'll turn the call over to Piers.
Piers Dayer Middleton, Chief Operating Officer
Thank you, West, and good morning, everyone. As both Quintin and West have mentioned, the short to medium-term outlook for the offshore sector remains challenging. Although we have seen a slight decrease in demand projected for 2025, we believe that with our favorable supply situation and one of the industry's youngest fleets, we are well-positioned to endure any short-term challenges and anticipate further progress in the latter half of 2026 and into 2027 as demand picks up for exploration and subsea construction projects. In Africa, we experienced a weaker second quarter compared to previous quarters due to the winding down of several drilling campaigns in the Orange Basin, which had significantly supported many of our larger PSVs in the region. We will continue to support the remaining drilling campaigns in Namibia for the rest of the year, although at a lower level of PSV activity compared to the past six quarters. However, to mitigate some of the expected slowdown in Namibia, we secured work in the Caribbean and mobilized several larger PSVs for drilling campaigns in Guyana and Suriname. Additionally, we have won work in Mozambique for a couple more of our large PSVs towards the end of the year to aid subsea construction projects that are anticipated to extend into 2026. In the short term, for the rest of 2025 in Africa, we are engaged in several ongoing discussions with clients for both drilling support and to help with a few construction projects scheduled to start in the fourth quarter. Looking further ahead, as we have noted in previous calls, we expect strong demand in the region from the second half of 2026 onward, driven by increased activity in drilling, subsea construction, and long-term production support. Moving to the Americas, we had a very solid quarter as we leveraged our global presence and top-tier operations to secure several new contracts in the Caribbean, allowing us to reposition vessels out of the North Sea and Africa, thereby alleviating some of the short-term pressures in those regions. We do not foresee any slowdown in the long-term potential of the broader area. The Caribbean is poised for growth, with both Guyana and Suriname advancing their developing offshore industries. While we have noted some delays in Petrobras' plans extending into 2026, the long-term outlook remains bright, with significant projects from both Shell and BW Energy gaining approval in the second quarter. In Europe, we posted a strong second quarter, supported by robust North Sea spot markets and good utilization in the Mediterranean during the first half of the year. Rates have remained solid in the U.K. and continue to be above historical averages. However, we expect a decrease in demand for the remainder of the year, which may put downward pressure on rates. Positively for the U.K., some incremental PSV demand is anticipated to support upcoming projects. The long-term outlook in the Mediterranean and Norway remains positive, but ongoing conflicts in the Eastern Mediterranean could impact several projects expected to launch in 2026, and we will be monitoring how this situation develops. In Asia Pacific, the quarter was relatively flat. The good news is that with issues affecting PETRONAS and Eastern Malaysia now resolved, we are beginning to see a recovery in demand in Malaysia, with locally-owned vessels that were previously under pressure starting to return to the market. Although it may take a few more quarters, expectations are that by year-end, operations in Malaysia will return to normalcy. In Australia, there are still several additional long-term PSV tenders for production support yet to be awarded, which are expected to commence in the fourth quarter, along with a number of construction support scopes also pending. Looking ahead, we foresee a very positive demand scenario emerging in late 2026, as many long-term exploration and development projects are set to commence in Indonesia, Myanmar, and Malaysia. Finally, in the Middle East, the market remains tight with limited vessel availability. We expect supply constraints to continue, as EPCI contractors actively utilize available vessels to support operations in Qatar and Saudi Arabia, providing opportunities for rate increases as our vessels become available. However, this is a highly fragmented market, causing rate increases to take longer to implement compared to other parts of the world. Long-term, we do not anticipate any slowdown in the region, with the supply-demand dynamics continuing to favor shipowners for the foreseeable future. With that, I will turn the call over to Sam. Thank you.
Samuel R. Rubio, Chief Financial Officer
Thank you, Piers, and good morning, everyone. At this time, I would like to take you through our financial results. As in prior calls, my discussion will focus primarily on sequential quarterly comparisons which include the second quarter of 2025 compared to the first quarter of 2025, also including operational aspects that affected the second quarter. As noted in our press release filed yesterday, we reported net income of $72.9 million for the quarter or $1.46 per share. We generated revenue of $341.4 million compared to $333.4 million in the first quarter, an increase of $8 million or 2%. Second quarter average day rates of $23,166 were 4% higher versus the first quarter. We saw a slight decrease in active utilization from 78.4% in the first quarter to 76.4% in the second quarter due mainly to the increase in idle and dry dock days and several dockings scheduled in Q1 were pushed to Q2. Gross margin in the second quarter was $171 million compared to $167 million in the first quarter. Gross margin percentage in the second quarter remained steady at 50.1% and now marks 3 consecutive quarters with margins over 50%. Margin outperformance versus our expectations was primarily due to higher-than-expected day rates and utilization, combined with lower-than-expected operating costs, primarily related to lower repair and maintenance costs due to overall fewer repair days and lower salaries and travel costs due to reduced manning on some idle vessels. Adjusted EBITDA was $163 million in the second quarter compared to $154.2 million in the first quarter. As a reminder, in Q4 '24, we reported a $14.3 million FX loss that negatively impacted our adjusted EBITDA. In the first quarter of 2025, we experienced a partial reversal of this FX loss in the quarter to a $7.6 million FX gain and in Q2, we experienced an additional FX gain of $11.7 million as a result of the continued weakened U.S. dollar. As it relates to tax expense during the quarter, we reversed the valuation allowance related to U.S. net operating losses we generated during earlier periods. We made this reversal due to our increased confidence in the sustainability of our global profitability. The reversal resulted in a one-time noncash increase to net income of $27 million. Operating costs for the second quarter were $170.5 million compared to $166.4 million in Q1. The increase in costs is due primarily to an increase in salaries and travel and repair and maintenance costs as we had one more day of operation in the quarter, together with FX impacts due to the weakening U.S. dollar. The combination of which contributed $4.3 million to the increase. In the quarter, we also had 192 higher idle days, 245 higher dry dock days, and 59 more mobilization days, which contributed to an increase of $700,000 in fuel costs for the quarter. Offsetting these increases were insurance and other operating costs that came in lower than prior quarter. G&A expense for the second quarter was $31.2 million, $2.1 million higher than the first quarter due primarily to an increase in personnel costs as well as an increase in professional fees. We are projecting G&A expense to be about $120 million for 2025, which includes $15 million of noncash stock-based compensation. As a reminder, we conduct our business in 5 operating segments. I refer to the tables in the press release and the segment footnote and results of operations discussions in our Form 10-Q for details of our segment results. In the second quarter, consolidated average day rates were up versus the first quarter. However, results varied by segment, with our Europe and Mediterranean day rates improving 14% and our Americas day rates improving by almost 3%. We saw marginal increases in day rates in our APAC and Middle East regions, offset by a day rate decrease in Africa of about 5% quarter-over-quarter. Total revenues were up compared to the first quarter with revenues up in our Americas and Europe and Mediterranean regions by 28% and 27%, respectively, quarter-over-quarter. While revenues in all other regions decreased compared to Q1, with the largest decrease in our Africa region of 22%. Regionally, overall gross margin increased in the Americas region by 14 percentage points, and in Europe and the Mediterranean region by 10 percentage points, with a decrease in our other 3 regions. The increase in the Americas region was due to increases in average day rates and utilization as well as a minor decrease in operating expenses. The increase in the Europe and Mediterranean region was primarily due to an 8 percentage point increase in utilization and a 14% increase in average day rates due to typical calendar seasonality and a stronger-than-expected North Sea spot market. In our APAC region, gross margin decreased about 2 percentage points, primarily due to a slight decrease in utilization, partially offset by higher average day rates and slightly lower operating costs. Our Middle East region also saw a gross margin decrease of about 8 percentage points due to a decline in utilization, combined with an increase in operating expenses due to higher fuel costs. The primary reason for the lower utilization was higher dry dock days and higher repair and idle days. In our Africa region, we saw a 12 percentage point decrease in gross margin due primarily to lower day rates, lower utilization and higher repair and maintenance and fuel costs resulting from higher dry dock repair and idle days. We generated $97.5 million in free cash flow this quarter compared to $94.7 million in Q1. The free cash flow increase quarter-over-quarter was primarily attributable to the stronger results from operations, lower dry dock and capital expenditure costs, and higher proceeds from asset sales, partially offset by a use of working capital. Last quarter, I mentioned that we had not received payment for several quarters from our primary customer in Mexico. We still have not received payment from them and our outstanding accounts receivable balance at the end of June represents approximately 14% of our total trade accounts receivable. As mentioned previously, this customer had periods of nonpayment in the past, but historically, we have not had any write-offs due to the collectibility of their receivables. We continue to monitor and assess this closely. During the second quarter, we made $12.5 million in principal payments on our senior secured term loan in addition to approximately $1.5 million in other debt repayments related to the financing of recently constructed smaller crude transport vessels. We also incurred $23.7 million in deferred dry dock costs compared to $43.3 million in the first quarter. In the quarter, we had 1,195 dry dock days that affected utilization by about 6 percentage points. For the year, we are projecting dry dock costs to be about $107 million, which is down about $6 million from our prior call. The decrease is due to the net effect of changes in timing of various '25 and '26 projects, in addition to the savings generated from our already completed 2025 dry docks. In Q2, we incurred $5.2 million in capital expenditures related to various projects, including ballast water treatment installations, EP system upgrades and IT upgrades, both onshore and vessel related. For the year, we still project capital expenditures of $37 million. During Q2, we spent $51 million on share repurchases to bring our total of 2025 repurchases to about $90 million. The Q2 repurchases reduced our shares outstanding by approximately 1.4 million shares. As Quintin and West mentioned earlier, we successfully refinanced our previous debt instruments into a longer tenored unsecured structure and we were also successful in entering into a $250 million revolving credit facility. We also announced our new authorized $500 million share repurchase program. Overall, we believe this new debt capital structure increases financial flexibility for Tidewater, and we are also excited about the opportunity for additional shareholder returns moving forward. On the tariff front, we have not seen a meaningful decrease in our costs, and we do not anticipate direct or indirect tariff exposure that will drive a meaningful increase in our costs. We acknowledge that many vendors are still evaluating tariff announcements. As such, the impact of these tariffs on our cost structure is subject to change moving forward. In summary, Q2 was exceptionally strong from an operations and execution standpoint. We delivered both strong financial results and free cash flow as well as returning a significant amount of cash to shareholders in the form of share repurchases. We also successfully refinanced our previous debt to a more suitable and flexible structure that aligns with our objectives and needs. While there is some amount of near-term uncertainty in the industry related to the timing of incremental vessel demand, the industry's long-term fundamentals remain very strong. Despite this uncertainty, we expect to achieve our full year financial guidance and expect to continue to generate strong free cash flows and profitability each subsequent quarter of the year. We remain optimistic about our current position and the opportunities that lie ahead for Tidewater. With that, I'll turn it back over to Quintin.
Quintin V. Kneen, President and CEO
Thank you, Sam. Ginnie, would you please open the call up for questions?
Operator, Operator
And your first question comes from Jim Rollyson with Raymond James.
Jim Rollyson, Analyst
Contract on a nice quarter, and congrats, Piers, on your promotion. Quintin, maybe since you brought it up, and I think I've heard it 3 or 4 times throughout the call, you brought up M&A and obviously, the flexibility that your new facility and financing and not need to keep all cash on the balance sheet provide you. Would love just to hear an update of kind of what you're seeing out there and if you think there's actually anything actionable in the fairly near term since you've been kind of evaluating opportunities for quite some time since your last transaction?
Quintin V. Kneen, President and CEO
Jim, thanks. So I would characterize the discussions over the past several months as becoming more constructive. If you take us back to last summer, everybody was very excited about the near-term outlook and I think prices for secondhand equipment and for companies got a little bit ahead of where I thought they should be. And I believe that people over the last several months have come to terms with what they see as the pace of the offshore cycle and probably just the growing awareness of the uncertainty or volatility that's inherent in our business. And so that's just brought people back to the table. So I am encouraged. It's always hard to know. I joke with West that we've probably been in due diligence for 6 years straight, and we had 3 or 4 transactions done. But we're still active in the market, and we look forward to getting things done, but we've got some significant price hurdles. Right now, just repurchasing our own shares is significant value. So I need to make sure that anything that we do outside of that creates just as much more value for our shareholders.
Jim Rollyson, Analyst
Yes, that makes sense and consistent with kind of how you thought about this in the past. And then maybe as a follow-up, as we've gone through last quarterly earnings season and so far this season, it seems like all the talk around or the thesis around back half of '26 into '27 and '28 drilling demand in the deepwater side at least is that all seems to still be in place based on what contracts have been let with some of the drillers that have reported so far are still talking about, and it seems kind of consistent with your comments, but I'd love to hear to whatever extent you have visibility going into next year, maybe in the second half and into the years after just from a demand perspective. You mentioned a slightly balanced supply/demand for vessels right now where you're not able to push rates, but you're still able to sustain rates just kind of put the pieces of the puzzle together to see if we get back to a market sometime next year or into '27 where you're actually able to push rates again?
Quintin V. Kneen, President and CEO
Well, that's certainly our house view. But I'll tell you what, I'm going to hand it over to Piers because he's got more visibility with the customers, and he can give you a little bit more color on what he's seeing developing in 2026.
Piers Dayer Middleton, Chief Operating Officer
Thanks, Jim, for the congratulations. As Quintin mentioned, our perspective is that we are noticing drillers beginning to secure contracts and they have been quite transparent about their progress for 2026. We are indeed observing increased tendering activity. We typically lag slightly behind the drillers, but there is certainly an uptick in tenders and pre-tenders emerging for those regions to facilitate drilling activities. Additionally, as we've indicated previously, our business is not solely reliant on drilling; we also encompass subsea construction, and we are starting to see relevant contracts come into play now, perhaps a bit later than anticipated, but they are coming in for Q4 and into 2026 as well. Therefore, we have a very optimistic outlook for the latter half of '26. We are seeing some growth in production projects and are already supporting development drilling. There are other projects emerging not only in the Caribbean but also in Southern Africa and Indonesia, as I've mentioned. Overall, it looks to be a significantly more favorable situation as we transition into the second half of '26, with all three areas: production, subsea construction, and drilling, potentially working simultaneously. Once we establish that demand alongside limited supply, it will present us with an opportunity to begin increasing rates again, similar to what we aimed for in '23 and '24.
Fredrik Stene, Analyst
I hope everyone is doing well, and it's great to see such a strong quarter. I'd like to discuss some themes that were touched upon in a previous question. Quintin, in your prepared remarks about the M&A story, you mentioned that there could have been three or four transactions that might have been realized, but various factors prevented them from happening at specific times. Your comments, along with what you've shared before about M&A, suggest that you might be more optimistic about closing deals now compared to before. Is that the case? If so, do you think it's because, despite the ongoing volatility in the market, people are better at assessing it now, leading to a sense of calm that could facilitate transactions?
Quintin V. Kneen, President and CEO
I believe that people are becoming more comfortable with the levels of uncertainty in the market. About a year ago, there seemed to be an overly optimistic view on the pace of recovery. Now, those involved are starting to understand what vessel supply will be needed, and they are not seeing any new supply entering the market. As a result, people are more at ease with the recovery trajectory and its pace. This has led to expectations that facilitate more constructive conversations. Overall, I feel more optimistic about the potential for progress now compared to previous quarters, although it’s challenging to navigate differing price expectations among parties. We remain committed to value creation and have the option to repurchase shares if necessary. We will strategically allocate capital, recognizing the benefits of acquiring vessels to modernize our fleet and enhance our competitive positioning in certain regions. Overall, I am more hopeful than I was in the last nine months about making progress, but we will take things as they come.
Fredrik Stene, Analyst
Perfect. Regarding the outlook for the year, you've provided thorough commentary on your expectations moving forward and reiterated guidance. Q1 and Q2 both exceeded initial projections. Looking back since our May call on the first quarter, what is the outlook for the second half? Is it facing more challenges now? It seems like the expected upturn might be delayed. Any insights on that would be appreciated. Additionally, for 2024, you initially provided guidance last year during the third quarter conference call. Considering last year's volatility, you adjusted your guidance for an extra quarter. Will you be able to give guidance for 2026 during the upcoming third quarter call, or is the outlook for next year still too uncertain to assess accurately?
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Fredrik, it's West. I'll try and parse your question there. I think on the last piece, referring to delaying our guidance from our kind of regular scheduled programming and doing so in Q3 of last year into Q4 results so at the beginning of the year. I don't know that we're necessarily in a position to confirm that yet. In terms of what we'll do for this coming year. I think in a perfect world, that would be our preference to get guidance out sooner rather than later. But similar to last year, I think we'll have to evaluate the market factors in play to understand our level of confidence in doing so. So we'll play that out over the coming months and quarters or so to see what the world looks like heading into 2026, and we'll make that determination when we get there. I'm going to restate your first question to make sure that we understand it, and that's our second half expectations from the Q1 call into the Q2 call. Is that correct?
Fredrik Stene, Analyst
Yes, how have those changed?
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
I believe it's accurate to say that our expectations for the second half have decreased compared to what we anticipated during the Q1 call. In our prepared remarks, we referenced our prior improvements in utilization for the latter half of the year. If you recall from the last earnings call, we had anticipated a significant increase in utilization for Q3 and Q4, but we've revised that expectation slightly. We do expect some improvement in utilization in the second half, just not as much as we previously expected. Looking at our full year guidance, we are still comfortable with it because of the strong performance in the first half and a generally positive outlook for the second half, although I want to clarify that our expectations for the second half, particularly regarding the increase in utilization, have been adjusted downward.
David Smith, Analyst
I think you mentioned Q3 utilization was expected to tick higher. Can you give a rough range of that improvement?
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Sorry, for the second quarter into the third?
David Smith, Analyst
Right. So the third quarter guidance, I thought your expectation was for utilization to tick higher, and I was just looking at...
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Yes, that's correct. To quantify, that would be a few percentage points of utilization improvement from the second quarter into the third.
David Smith, Analyst
I appreciate that. Even with a small increase in utilization, if I understood the guidance for Q3 correctly, revenue is expected to decrease by 4%. It also seems that average rates in Q3 could drop by $1,200 or more, and it appears that you have solid contracts for the quarter. I was hoping to gain some insight into that lower rate outlook, specifically whether it's influenced more by the mix, unfavorable contract rollovers, or perhaps some cautiousness in your projections.
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Dave, I want to refer back to the discussion on day rates, and your understanding is accurate. We noted that day rates in the North Sea and West Africa have softened somewhat. As mentioned in the prepared remarks, the second quarter in the North Sea was relatively robust, which is typical for this time of year. That was encouraging. However, both Piers and I indicated that we anticipate a slight decline in demand in the North Sea as we enter Q3, leading to a tapering off. Similarly, in West Africa, due to some factors that Piers mentioned about drilling and the timing between contracts, we expect a decrease there as well. Additionally, it's important to note that we benefited from foreign exchange in the second quarter, impacting both day rates and other financial aspects. We are not projecting a significant improvement in FX rates to boost day rates going forward. So, considering all these factors, your conclusion is correct: with a minor uptick in utilization, we do expect a slight reduction in day rates as we move into the third quarter.
David Smith, Analyst
I appreciate that. And if I could sneak a quick follow-up. Just wanted to make sure if I'm understanding the full year guidance correctly in the Q3 then the midpoint for the full year kind of suggests Q4 vessel margin that steps up about $30 million compared to the Q3 outlook, which would be a pretty strong uplift compared to fourth quarters from prior years. And I know you touched on it in the prepared remarks, but could you give just a little more color on that visibility for the activity drivers in Q4?
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
I will address the first part, and then Piers can share his perspective on the macro and activity landscape. You're correct that in order to hit the midpoint of our full-year guidance, based on our Q3 performance and the details we've shared about Q3, we would need to see a significant increase in Q4. That interpretation is accurate. Now, I'll hand it over to Piers to discuss the activity drivers he anticipates for Q4.
Piers Dayer Middleton, Chief Operating Officer
Yes, thank you, West. Q3 is going to be slightly different than we anticipated. However, as I mentioned, we're already seeing several tenders for drilling activities in Africa, and subsea construction is also beginning to increase. We've noticed a decrease in some of our large PSVs, which have been very effective in Namibia supporting drilling campaigns there, but we expect that to rebound in Q4. This is why we have a more optimistic outlook as we approach the end of the year, particularly for Africa, especially in Mozambique and Angola. Additionally, we're also observing an increase in activity in the Asia Pacific region. Although there was a slight slowdown in Q3, numerous projects in Australia are anticipated to gain momentum in Q4. Occasionally, we experience minor short pauses in our operations while we wait for new contracts, but we are now starting to see those tenders coming through. As we've noted in previous calls, subsea construction projects generally have a quicker turnaround for awarding contracts. Oil companies usually work within a 6 to 12-month timeframe, whereas construction tenders often give just 30 to 90 days of notice. That's what we're currently managing, and we expect the subsea construction segment to pick up in Q4.
West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations
Dave, if I could add one more data point to Piers' commentary more on the fleet side. Just to remind you, we do expect dry dock days to fall by half in Q4, which equates to about 3 percentage points of utilization.
David Smith, Analyst
Congrats on the great Q2 performance and the debt refi.
Operator, Operator
Your next question comes from the line of Josh Jayne with Daniel Energy Partners.
Joshua W. Jayne, Analyst
First one, I know you talked about some utilization softness in West Africa over the near term. But could you talk about your multiyear outlook there as it seems to be one of the regions when you listen to driller optimism over '26, '27 and beyond? How do you see this playing out versus some of the other regions where you have opportunities to deploy assets over the next couple of years?
Piers Dayer Middleton, Chief Operating Officer
Yes, I’m happy to address that. We remain very optimistic about Africa. While the cyclical nature of the market always presents some challenges, we have been quite active over the past six quarters, particularly supporting drilling efforts in Namibia. We do expect this activity to slow down somewhat over the next year. However, as we move into the second half of 2026, we anticipate that several projects will transition into a development phase. This phase generally involves signing contracts for multiple rigs and entails significant drilling over a longer duration, similar to what we are currently undertaking in Suriname and Guyana, where development phases last 2 to 3 years. Once these initiatives ramp up, we're also seeing support for operations in Southern Africa, which will boost demand for larger PSVs. Additionally, we are currently involved in projects in Congo, which is also seeing new production. While it seems there will be a pause in drilling activities over the next few quarters, we expect an uptick in exploration and development in 2026, contributing to increased demand. Another point we noted on the last call is that Nigeria, while not a focus for us right now, is also actively engaging drillers, and this will absorb some supply from other operators. Therefore, while the near term may be quieter than what we've experienced recently, the longer-term outlook for Africa is very positive, with plenty of upcoming work on the horizon. Our improved outlook towards the end of the year is mainly attributed to developments in Africa, particularly Mozambique and Angola. Additionally, we are observing growth in the Asia Pacific region, with a minor slowdown in the third quarter. However, we anticipate a rise in projects in Australia during the fourth quarter. Occasionally, there are brief fluctuations in our business while we await new contracts, but we are beginning to see those tenders materialize. As previously mentioned, subsea construction usually has a shorter timeline, with contracts being awarded more quickly. Oil companies typically operate within a 6 to 12-month window, whereas construction tenders may provide notice in just 30 to 90 days. This is the situation we are currently managing, and we expect the subsea construction segment to gain momentum in the fourth quarter.
Quintin V. Kneen, President and CEO
Thank you, everyone, for listening, and we will update you again in November. Goodbye.