Earnings Call Transcript - TDW Q3 2022

Operator, Operator

Good morning. My name is Colby and I will be your conference operator today. At this time I would like to welcome everyone to the Tidewater Q3 2022 Earnings Conference Call. I will now turn the call over to West Gotcher.

West Gotcher, Executive

Thank you, Colby. Good morning, everyone, and welcome to Tidewater's earnings conference call for the 3 and 9 months ended September 30, 2022. I'm joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Financial Officer, Sam Rubio; and our Vice President of Sales and Marketing, 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 make during today's conference call. Please refer to our most recent Form 10-K and 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, November 4, 2022, therefore, you're advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures can be found on our website at tdw.com and is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Quintin Kneen, CEO

Thank you, West. Good morning, everyone, and welcome to the third quarter 2022 Tidewater Earnings Conference Call. I'm pleased to say that as the offshore vessel market continued its momentum during the third quarter, we saw a meaningful improvement in our profitability and free cash flow generation. The most talked about indicator of the strength in our business, the average day rate increased by nearly $1,100 per day in the quarter on slightly higher active utilization of 83.7%, which is up about 1.2 percentage points. You may recall that we have previously discussed that fleet-wide average day rate increase over the entire year during a typical upcycle was about $1,500 per day. We passed that benchmark in the second quarter with the average day rate up nearly $1,900. And year-to-date, we are now up $3,000 per day. This additional step up in average day rate in the third quarter is emblematic of the tightening of the supply and demand in the offshore vessel market we have been discussing. It was set up by the significant vessel attrition over the past several years and actuated by the increase over the past year in global offshore activity. The increase in global activity began in the third quarter of last year and was based on steadily increasing oil prices as global economic activity increased subsequent to the easing of pandemic restrictions and has further increased over the past 6 months as conflict in Ukraine moved the focus of decision-makers to energy security. During the third quarter, we entered into 54 new contracts covering 38 vessels. For those vessels that we entered into multiple contracts during the quarter, each follow-on contract was signed at a materially higher day rate than the first contract. The average duration of the OSV contracts we entered into during the third quarter was approximately 4 months, which is indicative of our chartering strategy of going short from a contract duration perspective allowing us to continue to realize further upward pricing momentum in today's market. For the third quarter, revenue increased meaningfully, up 17% compared to the second quarter. Total revenue increased to $191.8 million in the third quarter compared to $163.4 million in the second quarter. Looking at this on a per active vessel basis, revenue was up approximately 11.5% sequentially. The average day rate was up about 8.5% sequentially with the increase in active utilization driving the remainder of the increase in per vessel revenue. Vessel level cash margin expanded 2.4 percentage points to 41%, well in excess of the 30% target we've talked about in recent quarters and up nearly 12 percentage points from the third quarter of last year. Our Europe/Mediterranean fleet led the way with an 11% sequential improvement in day rates in the U.K. and Mediterranean. The third quarter is usually one of the seasonally strong quarters in this segment, particularly in the North Sea, given the favorable weather conditions. Vessel level cash margin improved considerably during the quarter, up 15 percentage points sequentially to nearly 55%, more than twice the margin realized in the third quarter of 2021. Utilization also increased meaningfully in this market, up to 95% from 88% in the prior quarter. We've talked about our decision to play the spot market a bit in this region, which proved to be a good strategy this quarter. Drilling and development activity in the North Sea remained robust, where all-time high day rates were realized for anchor handler vessels during the quarter. We are pleased with the results during the quarter and remain bullish on this segment as we look to 2023. West Africa continued to show strong momentum during the quarter. Day rates improved 7% sequentially to about $11,500 per day, now up about 34% from the same period in 2021. Vessel level cash margin was essentially flat during the quarter as active utilization ticked down to 79% from 83%. This drop in utilization was due to a handful of vessels caught between contracts with short interim periods of unemployment. We expect utilization to rebound from this, and this will provide additional cash margin increases in 2023. Nearly half of the fleet acquired from SPO is located in West Africa, and OpEx in this region continues to be higher than usual due to the acquired cost structure, but we remain confident in realizing the consolidated OpEx synergies we've discussed of $25 million per year which, when realized, will provide increased operating margins in this region and in Asia Pacific as we progress through 2023. Turning to our Middle East region. During the third quarter, average day rate improved by 3% to about $9,800 per day. Vessel cash margin was over 30%, well in excess of anything we've seen in recent years. Although the third quarter day rate progression was modest on a year-over-year basis, day rates in the region are up nearly 20%, which is a fairly substantial move in the vessel market of this nature which is characterized by a more fragmented group and lower specification vessels. Looking forward, the principal customers in this region have recently announced aggressive growth plans for the coming years, which will have positive implications not only for the Middle East, but for the other regions competing for similar tonnage such as Asia Pacific. This growth will continue to drive day rates in this region, but will also provide for day rate improvement in other regions as vessels are induced to relocate reducing supply in those regions. Turning to the Americas segment. Average day rate improved about 2% sequentially, while utilization decreased by approximately 7 percentage points. There were a variety of factors that drove the reduction in utilization. We added 1 vessel back to the active fleet as we work to reactivate ahead of the work commencing in 2023. We had a few vessels that came off contract late in the quarter that are commencing new contracts beginning in November. Additionally, we had a handful of vessels come off of work to undergo dry-dock and mobilize to other regions within the Americas. We expect this functional employment to moderate as well in the fourth quarter and for utilization to continue an upward trajectory through the remainder of the year and into 2023. Lastly, I'd like to turn to our Asia Pacific segment. Day rates were up around 35% during the quarter, driven primarily by a number of our larger PSVs rolling on to new contracts and resetting day rates in the region to new benchmark levels. We are now seeing day rates in line where we have successfully been able to push rates to on larger PSVs in other regions. Our G&A costs during the quarter totaled $27.3 million, which includes approximately $4.3 million in professional fees and other transaction-related expenses associated with the SPO acquisition along with $6 million of SPO-related G&A expense. Excluding these items, legacy Tidewater G&A is $16.9 million per quarter compared to a pre-acquisition G&A run rate for legacy Tidewater of $17 million. The quarterly SPO G&A run rate of $6 million compares to its pre-acquisition run rate of $8.75 million. So on an annual basis, SPO G&A is down $11 million compared to our G&A synergy target of $20 million. We remain confident in our ability to realize the $20 million of G&A synergies related to the acquisition and expect to capture the remaining benefit by the end of the first quarter of 2023. Free cash flow for the quarter was $21.9 million compared to a cash outflow of $14.9 million in the second quarter, representing a $36.8 million improvement sequentially. Over the prior few quarters, we've invested in working capital as the business grew, and we had some customers that weren't paying timely. Fortunately, we've been able to remedy some of the slow-paying customer issues and the investment in working capital is now moderating. In fact, although revenue grew 17% sequentially, our accounts receivable balance ended the quarter below the second quarter balance. We do expect to continue to make necessary investments in working capital as the business continues to grow. However, we believe the investment will be proportional to revenue growth and that we've now reached a point where the business is positioned to generate meaningful free cash flow on a quarterly basis. We remain confident that market conditions will result in our entire fleet working by the end of 2022, a combination of reactivations and disposing of non-core vessels. We ended the quarter with 8 vessels remaining in the held-for-sale category, which includes 1 SPO vessel added as part of the acquisition. We also have 6 vessels classified as stacked. We will evaluate the possibility of reactivating any of the remaining stacked vessels. However, we expect to sell or otherwise dispose of all the remaining stacked and held-for-sale vessels during the fourth quarter. Vessel layoff costs were $1.1 million in the third quarter, slightly above the second quarter. Costs associated with COVID-19 continue to fall. They amounted to about $150,000 in the third quarter. We expect the vessel layoff costs and COVID-19 costs to essentially default to 0 in 2023 as the remaining stacked assets and held-for-sale vessels are disposed. In summary, we are very pleased with the third quarter results. Although we do expect some typical seasonal variation in the fourth quarter and in the first, we believe that the fundamental factors that are driving profitability in our business, robust offshore activity and an increasingly tight vessel supply market will continue to drive increases in profitability throughout 2023. And with that, let me turn the call over to Piers for an overview of the global markets and the company's performance within.

Piers Middleton, VP of Sales and Marketing

Thank you, Quintin, and good morning, everyone. Over the last 2 quarters, we have talked about some of the supply and demand issues we're seeing that are affecting the global OSV market today. And why with our modern larger fleet of PSVs and HTSs we feel we are well placed to take advantage of this continuing upturn in the market. And whilst these larger vessel classes where we've been able to really drive day rates the most over the last 12 months, we are now starting to see some of the effects of the supply-demand pressures in the larger class of vessels beginning to push rates in our smaller vessel classes as well, paying truth to the old adage that a rising tide lifts all boats. Specifically, on the OSP side, we have continued to see the increase in demand and shortness of supply impact rates positively on the upside, with Clarksons Research reporting global 1-year time charter rates for the largest PSVs at approximately $23,400 per day levels compared to $22,000 per day last quarter and 1 year time charter rates for large HTSs averaging $32,500 per day compared to $31,000 per day last quarter. All positive indicators that the market as a whole is pushing rates in the right direction quarter-by-quarter. This quarter, you will note that we have changed some of the matrices of how we are tracking and reporting on our vessel classes so that we are more aligned in how the industry tracks the OSV global fleet by square meters for PSVs and brake horsepower for anchor handlers with the intent that we can deliver a clearer picture both internally and externally as to how and where we are driving the OSV market. Working through our various regions and starting with Europe. As Quintin mentioned, this region had a very strong quarter, and we continue to see the North Sea rig operators increasingly focused on securing capacity of half semi-subs in the medium term with slow projected demand in the region declining to 31 units by end 2024, up from 24 currently, and that we will continue to see strong demand in the region in the medium to long term. We mentioned last quarter about record high spot rates of GBP 173,750 per day for larger AHTSs, which in turn helped our own large 16,000 BHP plus class of AHTS averaged $74,231 per day for the quarter. And for our largest 900 square meter plus class of PSV we averaged a composite fleet rate of $16,239 per day for the quarter compared to $15,496 per day in Q2 and $12,238 per day in Q3 2021. All in all, some very impressive rate movement over the last 12 months. Moving to Africa. Activity continued to pace across the whole region with an uptick in rig activity during the quarter boding well for a significant increase in the floating rig count in the region by end 2023. Across the continent, we have a good cross-section of vessel classes and have seen rate rises across all classes of OSVs over the last 12 months, including the smaller vessel classes. Even for our smallest, 4,000 to 8,000 BHP class of anchor handler, we have pushed up the composite fleet rate by 25% from $8,500 per day in Q3 2021 up to $10,595 per day in Q3 2022, driven in part by leading edge day rates in the quarter for this class of vessel in excess of $15,000 per day. Similarly, for our sub 900 square meter class of PSV, we have pushed up composite day rates by 23% for this class from $10,303 per day in Q3 2021 up to $12,721 per day in Q3 2022 with our leading edge day rates during the third quarter being in excess of $25,000 per day. In the Middle East, which includes India, the market continues to tighten with several large OSV tenders still in the market, some of which are now calling for commitments with commencement in 2024 and beyond, which indicates customers' concerns about lack of OSV supply going forward as they try to fix contracts forward. Since Q3 2021, we have seen rate rises in the region across all asset classes. With a large 900 square meter plus class of PSV, jumping 85% from $13,011 per day in Q3 2021 to $24,061 per day in Q3 2022 and on the anchor handler side, by 8,000 to 16,000 BHP class, rising 19% from $8,938 per day in Q3 2021 to $10,666 per day in Q3 2022. The region has always been and will remain a highly competitive marketplace, but it is a testament to our team in the region that they have remained disciplined in making sure they continue to push rates across all vessel classes in such a fractured region. In the Americas, we saw continued high demand in Brazil in Q3, driven by Petrobras for both AHTSs and PSVs. As an indicator of the underlying strength in the market, during the quarter, Petrobras closed a reverse auction for the 145 ton volatile 4-year AHTS requirement with the lowest bid coming in at roughly $35,000 per day levels, which equated to a 76% year-on-year increase from similar rate levels in 2021. While most of our Americas fleet is PSVs the team pushes rates in Q3 2022 across all classes of OSV over the prior 12 months, moving our 16,000 BHP AHTS class from $17,750 per day in Q3 2021 up to a fleet composite rate of $20,175 a day in Q3 2022 with leading-edge day rates achieved in the high end of that range. Likewise, on the smaller sub-900 square meter class of PSVs, the team drove composite fleet day rates up 27% from $11,932 per day in Q3 2021, up to $15,197 per day in Q3 2022 with leading-edge day rates for the quarter again, in excess of $25,000 per day. Lastly, in Asia Pacific. As Quintin mentioned, we now feel we are seeing the region starting to catch up in terms of day rate movement compared to our other regions. But we probably won't start seeing significant movement in the region until Q1 of 2023 when traditionally, you start to see the pickup of projects really kick off in the region post-monsoon season. For our large 900 square meter plus class of PSV, the team increased rates 77% in Q3 2022 to $25,072 per day level from $14,126 per day in Q3 2021 with leading-edge day rates in excess of $30,000 per day for the region. Similarly, for our smallest class of 4,000 to 8,000 BHP AHTS composite fleet rates rose 26% from $5,346 per day in Q3 2021, up to $6,759 per day in Q3 2022. With leading-edge day rates in excess of $10,000 per day for the region. Overall, as mentioned by Quintin, we are very pleased with how the market has continued to move in the right direction in Q3, and our team's continued outperformance of the market, and we fully expect that positive momentum to continue into subsequent quarters throughout 2023.

Samuel Rubio, CFO

Thank you, Piers, and good morning, everyone. I would now like to take you through our financial results and discuss some key points that make up these results. My discussion will focus primarily on quarter-to-quarter results comparing the current quarter to the second quarter of 2022. As noted in our press release filed yesterday, we reported net income of $5.4 million or $0.10 per diluted share. From an operational perspective, we continue to generate meaningful revenue quarter-over-quarter. Our revenue for the third quarter of 2022 was $191.8 million. This is a $28 million or approximately 17% increase from the second quarter of 2022. Compared to the same quarter last year, that increase is close to $100 million. This is the result of the SPO acquisition, and significant organic day rate and utilization increases each quarter throughout the company. The sequential revenue uplift benefited from the higher day rate and a full quarter effect of the SPO vessels. Utilization also increased sequentially with active utilization of 83.7% compared to 82.5% in Q2. As mentioned, day rates improved 8.5% to $13,606 per day in the third quarter from $12,544 per day in the second quarter. Overall, gross margin for the quarter increased nicely to 41%, up from 38% in Q2. Vessel operating costs for the quarter was $113 million, an increase of $12.8 million from Q2, principally driven by the addition of the SPO vessels and increased activity as we had several vessels mobilizing in and out of new contracts. Legacy SPO vessels contributed $10.4 million to the increase in operating costs. Vessel operating cost per marketed day in Q3 was approximately $6,700 per day. As expected, this is an increase from Q2 as we absorb the full effect of the SPO fleet. However, we expect to see costs decrease going forward as we continue realizing identified synergies associated with the SPO fleet. As a reminder, our targeted operating expense synergy amount is $25 million, which once realized, will reduce our cost per day substantially. In the quarter, we sold 1 vessel for net proceeds of $315,000 and recorded a net gain of $268,000 on this vessel. We also charged $1.2 million to impairment expense related to inventory obsolescence. We reviewed the inventory and performed physical counts each year in Q3. We generated operating income of $19.1 million for the quarter, an improvement of $17.2 million from Q2, driven by higher revenue resulting from higher day rates, slightly higher utilization, and capacity additions as the full SPO fleet operated throughout the entire quarter. G&A expense for the quarter was $27.3 million, slightly down from Q2. The third quarter included $4.3 million of transaction expenses associated with the SPO acquisition compared to $7.3 million in Q2. G&A expense in the third quarter included $6 million associated with the legacy SPO entities, which is already well below run rates of about $8.8 million per quarter. On an annual basis, this would equate to a decrease in G&A costs of approximately $11 million, which was slightly over half and in line with our synergy target of $20 million. We continue to achieve synergy success and anticipate realizing the remainder of the G&A synergies by the end of Q1 2023. We expect G&A expense to continue to decrease in Q4, bringing our full year cost close to $100 million, which includes professional fees and other transaction costs related to the SPO acquisition. Our goal is to achieve an annual run rate of approximately $85 million once the integration is complete. In the quarter, we incurred $12.8 million of deferred dry dock costs compared to $18.5 million in Q2. Q2 has been our heaviest dry dock quarter for the year due to regularly scheduled dry docks and vessel reactivations, which also included a few vessels associated with this SPO fleet. In the quarter, we incurred 476 dry dock days, which negatively impacted utilization by 3%. We expect to incur approximately $13 million in dry dock costs in Q4, bringing the total to about $57 million for the full year 2022. In the quarter, we also incurred $6.3 million in capital expenditures. We expect CapEx for the full year 2022 to be about $15 million. We continue executing vessel modifications related to new contract requirements and technology initiatives. In addition, additional projects such as battery packs have been added, which has increased our overall CapEx for the year. Free cash flow was $21.9 million this quarter, which is an increase of $38.6 million from Q2, due primarily to increased accounts receivable collections. As anticipated, our working capital investment did normalize, leading to a decrease in accounts receivable, even with the increase in revenue during the quarter. We believe that working capital will increase modestly as revenue continues to increase, but we have reached a point where we should begin to generate strong free cash flows quarter-over-quarter. In Q4 2019, we began reclassifying vessels on our balance sheet from property equipment to assets held for sale. We have since run 86 vessels through this program. At the end of Q3, 2022, we had 8 vessels held for sale at a value of $6.8 million. During the third quarter, we sold 1 vessel for proceeds of $315,000. During the quarter, we agreed to the final working capital adjustment on the SPO acquisition and received a payment of $8.8 million. I would now like to focus on the performance of the regions. Our Americas region reported operating income of $3 million for the quarter compared to operating income of $5.9 million in Q2 of 2022. The region reported revenue of $39.2 million in Q3 compared to $37 million in Q2. The region operated 31 average vessels in the quarter, which was an increase of 2 from Q2. Active utilization for the quarter was 80%, which was down from 87% in the prior quarter. However, day rates increased to $16,901 from $16,569 per day in Q2. The decrease in operating income was due to higher operating costs, primarily attributable to increases in crew costs related to reactivation of vessels and a crew mix as vessels applied back to the United States from the Caribbean. For the third quarter, the Asia Pacific region reported an operating profit of $3.3 million compared to an operating loss of $900,000 in Q2. The increase in operating income was driven by the increase in revenue. The region reported revenue of $23.9 million in the third quarter compared to $16.4 million in the prior quarter as a result of the full quarter effect of the additional SPO vessels. The region operated at 15 average vessels, down 3 vessels compared to Q2, while revenue increases were influenced by the addition of the SPO vessels in this region. Active utilization also increased to 91.4% in the quarter compared to 70.4% in Q2. In addition, day rates improved by 35% to $18,530 per day in Q3 compared to $13,748 per day in Q2 as we continued to push day rates when contracts expire. Higher revenues were partially offset by increases in operating costs and general and administrative costs. As mentioned previously, the Asia Pacific region will be one of the beneficiaries of the targeted synergies moving forward. For the third quarter, the Middle East region reported an operating profit of $605,000 compared to an operating loss of $307,000 in Q2. The region reported revenue of $31.2 million in the third quarter compared to $28.4 million in the prior quarter. The region operated at 42 vessels, which was 1 vessel higher than Q2. SPO added 7 vessels to the segment in April. Active utilization increased by approximately 2 percentage points to 83% in the quarter compared to 81% in Q2, as this was one of the heavy Q2 dry dock regions. Day rates improved to $9,781 per day in Q3 compared to $9,490 per day in Q2. The improvement in operating income was due primarily to the increase in revenue, driven by higher day rates and a full quarter of the SPO vessel operations. Our Europe and Mediterranean region reported operating income of $13.1 million in Q3 compared to operating income of $4.3 million in Q2. We saw revenue increase to $39.7 million compared to $32.5 million in Q2. The region operated 26 vessels in the quarter, which was an increase of 1 vessel from Q2. Active utilization increased considerably to over 95% compared to 88% in Q2. We also saw a significant uptick in average day rates to $17,436 per day compared to $15,776 per day in Q2. As a reference point, day rates in Q1 were $12,144, which emphasizes the significant day rate growth in this segment in 2022. Day rates have increased 46% since the beginning of the year. In the quarter, the day rate increase was positively impacted by higher day rates realized from our anchor handling and supply vessels we operate in the region. The improvement in operating income for the quarter was mainly driven by the increase in revenue resulting from higher day rates. Q3 is typically the strongest quarter in the year, so we may see some drop off in Q4 and Q1 2023 due to the normal seasonality in that period. Our West Africa region reported operating income of $12.3 million in Q3 compared to operating income of $9.3 million in Q2. The market has continued to improve as we have seen revenue increase steadily for 7 straight quarters. Revenue for Q3 was $56.3 million compared to $47.4 million in Q2. The region operated at 8 more vessels on average in Q3, resulting from the SPO additions. Active utilization decreased slightly from 79% in Q3 to 83% in Q2. However, day rates increased to $11,467 per day in Q3 from $10,721 per day in Q2. The increase in operating income from Q2 resulted from higher revenue resulting from an increase in day rates, along with the effect of a full quarter effect of the SPO vessel additions. In summary, we are pleased to see the increase in revenue quarter-over-quarter in all of our regions, driven by newly acquired SPO vessels, reactivation of previously stacked or underutilized legacy Tidewater vessels, and higher day rates. We are encouraged to see continued positive signs in market activity. We anticipate both layoff costs and COVID-related costs to continue to decrease through the remainder of 2022. We expect layoff costs to virtually see by the end of 2022 and anticipate modest costs moving forward related to COVID-related issues. We remain very encouraged with the leading indicators we see for the remainder of '22 and into 2023.

Quintin Kneen, CEO

Thank you, Sam. In closing, I want to mention some of what we see for the remainder of 2022 and into 2023. On last quarter's call, I expressed our confidence that the back half of 2022 would provide a meaningful uplift. On the heels of a strong third quarter and what we're seeing in the fourth quarter, our view on the remainder of 2022 is incrementally more positive. For the remainder of 2022, our revenue backlog stands at $171 million. Contract cover is fairly evenly split across all of our vessel classes with our largest PSVs having the most exposure to a continually improving market. As we move into 2023, revenue backlog stands at $475 million, up from $400 million last quarter. Commercial momentum continues as our customers plan for what, by all accounts, appears to be another leg up in offshore activity in 2023. We plan on remaining committed to our chartering strategy of staying short to take advantage of continued attractive supply and demand fundamentals. This will allow for continued day rate improvement and drive earnings and cash flow generation that will ultimately accrue to our shareholders. And with that, Colby, we will open it up for questions.

Operator, Operator

Your first question comes from Fredrik Stene from Clarkson Securities.

Fredrik Stene, Analyst

Congratulations on a very strong quarter in terms of both performance and cash flow. I wanted to explore your contracting strategy regarding the decision to focus on shorter-term contracts to take advantage of the day rate improvements we're currently observing across most markets. Could you provide some context on how this compares to past cycles, particularly regarding the pace of improvement you've typically seen across your entire fleet over a year? Additionally, with this short-term chartering strategy in mind, can you offer any guidance on how quickly we might expect to see the day rates progress?

Quintin Kneen, CEO

I'm going to share my viewpoint first, then I'll ask Piers for his input, and hopefully, our thoughts will align. We have a very positive outlook for all vessel classes as we look toward 2023 and beyond. We're continuing with short charters, especially for the larger vessels, which has been quite successful for us throughout 2022, and I expect that will carry into 2023. As Piers pointed out, the tightness in the larger vessel market is driving up rates in the smaller categories, particularly for those just below the 900 square meter deck PSV category, which we're monitoring closely. We may also consider moving toward longer charters in that segment to take advantage of the market momentum. Our fleet consists of 200 vessels; while not every vessel is top-tier, I believe our fleet is significantly better than it was five to seven years ago. However, for the lower end of our fleet, including smaller tugs and older conventional dry PSVs, I think it makes sense to pursue longer contracts since those vessels can be more challenging to operate effectively. Now, I'll turn it over to Piers, who has detailed insights into that sector.

Piers Middleton, VP of Sales and Marketing

Yes, to reiterate, with our older, lower-spec vessels, we've extended contracts somewhat, as mentioned by Quintin. However, most of our fleet is now at a significantly higher specification. We have been able to move towards shorter contracts despite some pushback from our customers. Ultimately, they have come to understand our shorter-term strategy as the market improves. This is something we have been able to implement globally, and we plan to maintain this focus as we enter 2023. We see a considerable potential for rate increases, and it's an opportunity for us to continue pursuing that. The best way to achieve this is by keeping contracts short and ensuring we have as much flexibility on our side as possible, which we haven't been able to do for the past five years. While there has been some initial resistance from our customers, they appear to be accepting our strategy, even if they don’t necessarily agree with it.

Fredrik Stene, Analyst

That's super helpful. Just to follow up on the day rate side, there is usually some seasonality during the fourth and first quarter. Could you comment on that? Are you still optimistic about the future? How should we consider the potential seasonal weakness impacting average day rates over the next two quarters? Will there still be a significant upward trend?

Piers Middleton, VP of Sales and Marketing

I don't specifically discuss the North Sea and anchor handlers, but we are seeing a very tight market for HTSs as we enter 2023. There may be some seasonal impact, and I believe the North Sea might slow down a bit. However, we anticipate a very tight market as we approach Q1 with rising rates. Last year, we experienced record rates for anchor handlers and we expect that trend to continue into 2023.

Operator, Operator

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

James West, Analyst

So quite curious in your client conversations, particularly focused on the Middle East right now, you've seen somewhat of an unprecedented amount of announcements of increased productive capacity, both for oil and gas, a lot of which is going to come from offshore. And we're watching rigs getting snatched off the market left and right to support this, and I suspect the same thing is happening in the vessel market. So I'm curious to hear kind of what you guys are seeing in that region if the sense of urgency that they're showing in the rig market is rolling over into the vessel market as well and kind of what opportunities that's providing for Tidewater?

Quintin Kneen, CEO

Well, I'll tell you what Piers just come back from that. So I'm going to hand it over to him.

Piers Middleton, VP of Sales and Marketing

We're observing a significant number of tenders being issued, primarily driven by Aramco, which we also mentioned in our previous call. There's a lot of activity related to what Aramco is doing in Qatar, and there's additional activity involving LNG carriers in India within our Middle East region. This all indicates a strong demand to support the increasing rig activity. While it remains uncertain if they will be able to secure all the vessels they desire, this situation could allow us to increase rates. Overall, there is considerable vessel activity and potential demand, although it's unclear if they will acquire everything they are requesting. We view this as a very positive development and are focusing on it closely.

James West, Analyst

It's encouraging to hear. I've noticed that performance is increasingly becoming a focus for rigs, services, and vessels among Middle Eastern National Oil Companies. Traditionally, the region hasn't emphasized this, but due to the limited availability of assets and their serious objectives, does Tidewater's superior asset quality compared to local providers give you a competitive advantage?

Quintin Kneen, CEO

Absolutely. We talked about that market being a fragmented owner group and generally lower specification vessels, at least compared to the North Sea and Brazil. And what happened during the downturn is a lot of those vessels got even more neglected than the average vessel got neglected. And so the down for repair and other equipment failures on those types of vessels has been very high. So we work with Saudi Aramco and others in the region to develop what we call the best specification for operating. We feel like we're in a great position because we've been able to continually invest in our vessels. We've been able to continually invest in the technology on the vessels too. So yes, it definitely helps us out substantially.

Operator, Operator

Your next question comes from the line of Fredrik Stene from Clarkson Securities.

Fredrik Stene, Analyst

Just wanted to touch briefly on M&A as well. I think you've progressed well with the SPO acquisition. We're starting to see those cost synergies come into play already, but you're still having some older vessels that you mentioned that you're churning out. What do you think with the current end market environment? I think SPO general is starting to get a bit more traction both in the equity markets and also on the second-hand side. Are there still things to be done here? And what is your role within the M&A here?

Quintin Kneen, CEO

There is certainly more work ahead, but I believe we are in a strong position. I feel confident about where we currently are in the cycle. We have valuable equity and a balance sheet ready for investments. Our focus remains on achieving good returns on investments, and we are looking for the right pricing on these vessels. There's still much to do to improve the industry, and we are excited to be involved. The integration with SPO, which we discussed in this call, is ongoing, but it is not distracting us from pursuing our next deal. I look forward to executing our plans as we move through the rest of 2022 and into 2023.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to Quintin for closing remarks.

Quintin Kneen, CEO

Well, thank you, Colby. We will update you again in March. So thank you. Goodbye.

Operator, Operator

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