Earnings Call Transcript - TDW Q1 2024

Operator, Operator

Thank you for joining us. My name is Dee, and I will be your conference operator today. I would like to welcome everyone to the Tidewater First Quarter 2024 Earnings Conference Call. I will now turn the call over to West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations. Please proceed.

West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations

Thank you, Dee. Good morning, everyone, and welcome to Tidewater's First Quarter 2024 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 refer to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we are making during today's 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, May 03, 2024. Therefore, you're advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings press releases located on our website at tdw.com. And now with that, I'll turn the call over to Quintin.

Quintin Kneen, President and CEO

Thank you, West. Good morning, everyone. Welcome to the First Quarter 2024 Tidewater Earnings Conference Call. First quarter revenue and gross margin significantly exceeded our expectations. Both day rate and utilization surpassed our projections. We are certainly pleased with this performance since the first quarter is usually the slowest in terms of activity. Due to typical seasonal factors affecting some of our operating areas, we utilize this time to schedule drydock maintenance, preparing our fleet for a busier workload later in the year. Not only did this first quarter exceed our expectations, but it also outperformed the fourth quarter, which itself was better than the third quarter. This sequential improvement during a typically slow period highlights the strength of the cycle over the calendar year seasonality. The impact of seasonality is present, but the rise in average day rates from contracts rolling into higher rates more than compensates for it. Day rate momentum in the first quarter was widespread, with strong sequential growth across all our vessel classes. Notably, our large class of anchor handlers showed consistent day rate increases across multiple regions, with a composite rate up about 27%. Large anchor handlers mainly support the mobilization and movement of drilling rigs and typically see the most benefit during busy, seasonally favorable periods such as the second and third quarters. First quarter results also suggest that the supply of large anchor handlers remains tight, and the ongoing transition of all vessels to new leading-edge contracts will likely keep increasing the reported quarterly average day rate. During the quarter, we repurchased $3.5 million of shares on the open market, and after the quarter ended, we purchased an additional $12.5 million of shares. We also used $28.5 million in cash to buy shares from employees to help them cover the tax implications of their equity compensation, reducing the need for those employees to sell shares in the open market. So far this year, we have spent $44.5 million to decrease the share count by around 492,000 shares. We remain opportunistic regarding share repurchases and will continue to evaluate their benefits against other capital allocation opportunities, based on our assessment of the shares' intrinsic value and other potential investments. We are still pursuing acquisitions but believe our share repurchases have so far been the most effective use of capital. We are focusing on companies in North and South America for acquisitions, while remaining open to opportunities elsewhere. In summary, we are very satisfied with our business performance in the first quarter, and we remain optimistic about the ongoing surge in offshore activity due to the positive leading indicators we noticed in the quarter, coupled with the sustained tightness in vessel supply and limited new builds. We will continue to focus on generating free cash flow and will allocate capital in ways that enhance shareholder value. Now, I'll hand the call back to West for further comments and our financial outlook.

West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations

Thank you, Quintin. To provide some additional context on our share repurchase program. We are pleased to announce that our Board of Directors has authorized an additional $18.1 million of share repurchase capacity. This incremental authorization, combined with our remaining authorization from the last announced authorization, provides for $50.7 million of authorized share repurchase capacity. The outstanding and authorized share repurchase program represents the maximum amount permissible under our existing debt agreements. To date, our capital allocation philosophy has been governed by our free cash flow generation or beyond the intrinsic value of our shares relative to where our shares trade on the market, our current debt capital structure and competing capital allocation opportunities. Our current debt capital structure is reaching a point at which we believe there is an opportunity for us to evaluate steps to establish a long-term debt capital structure, more appropriate for a cyclical business and to allow for additional shareholder return capacity. Irrespective of the complexion and flexibility of our capital structure, the guiding principles of our capital allocation philosophy will remain consistent. We will remain rigorous in evaluating the relative merits of each opportunity we look at to pursue the most value accretive uses of our capital. In addition, we will remain mindful of our balance sheet maintaining a clear line of sight to a net cash position in about 6 quarters for any capital allocation decision we make. During the first quarter, leading-edge day rate momentum continued to improve nicely to $30,641 per day. We entered into 19 term contracts during the quarter with an average duration of about 9 months. We anticipate that we will continue to see continued improvement in leading-edge day rates as we progress through the year given the persistent tightness in vessel supply and increasing chartering activity as we approach the busier quarters of the year. We remain confident that we can achieve an average day rate to improve by approximately $4,000 per day on a year-over-year basis. Looking to the remainder of 2024, we reiterate our full year guidance of $1.4 billion to $1.45 billion of revenue and 52% gross margin. As we progress through the year, we now anticipate revenue to increase slightly in the second quarter due to better-than-anticipated revenue performance in Q1 and to the pull forward of some drydocks, the mobilization of a few vessels and some unplanned maintenance in the second quarter. We still anticipate a meaningful step-up in revenue in the third quarter and continued strength into the fourth quarter. Similarly, we anticipate relatively flat gross margins in Q2 due to the factors previously described, but expect about 7 percentage points of margin expansion in Q3 and maintain our expectation of Q4 gross margin exit rate of 56% in the fourth quarter. Setting us up well for continued margin expansion as we enter what is expected to be an even stronger market in 2025. Our backlog currently sits at about $930 million of revenue for the remainder of 2024, with 74% of available vessel days contracted for the remainder of the year, with our largest classes of PSVs and anchor handlers having the most exposure to contract repricing opportunities throughout the remainder of the year. With that, I'll turn the call over to Piers for an overview of the commercial landscape.

Piers Middleton, Chief Commercial Officer

Thank you, West, and good morning, everyone. This quarter, I will talk a little about what we are seeing in each of our regions as we look out for the rest of the year and into 2025. Overall, the outlook for the OSV market remains strong, with the ongoing upturn in project investment expected to continue to drive additional incremental demand out beyond 2026. While the limitations in the supply of any additional OSVs to the global fleet will further exacerbate the tightness in the OSV space, so far, this tight supply-demand balance has been reflected positively in our rates for Q1 2024 by pushing our fleet composite day rate up by almost $1,497 per day compared to Q4 2023. Furthermore, based on our outlook for the market, we see no need to move away from our current short-term chartering strategy that we've been very vocal about over the last few years. Again, this has been reflected in Q1 with our average charter length for new contracts remaining in the 9-month period, which was the same as we saw in Q4 2023. Working through our various regions and starting with Europe. The North Sea spot PSV market has been a little slow to pick up in the first few months of the year, which is not unusual for Q1. However, that was offset by stronger demand on the term side of the business, both in the U.K. and Norwegian sectors for PSVs, with charters coming to the market early in the year to ensure they have the necessary cover over the busy summer periods and through Q3 and Q4. On the large anchor handlers, we saw rates reported hitting above GBP 120,000 per day mark during Q1. Indications for the number of projects that were delayed in 2023 are now planned to start in 2024, which bodes well for our large anchor handlers for the remainder of the year. In Africa, even with the busy drydock schedule in the region, we had a strong Q1, predominantly led by increased drilling activity in Angola, Namibia, and Senegal, which requires the support of our larger anchor handlers and PSVs in the region. We expect some slowdown in Q2 in drilling demand in the region as rigs reposition to different countries in Africa. We see drilling restarting in full force again as we move into the second half of 2024 and out into 2025. In the Middle East, with the recent news in Saudi Arabia, we may see some short-term demand slowdown, specifically related to work in the Kingdom. However, we continue to see significant demand requirements from other countries in the region as well as from the contractors supporting projects already ongoing in the Kingdom that we expect will more than offset any near-term slowdown that we may experience from a rig count reduction in Saudi Arabia. In the Americas, as mentioned on our last call, demand in Brazil remains strong, led by Petrobras as they continue to fill their long-term vessel requirements. With tonnage from other areas of the world slowly being introduced into Brazil, we expect to see further tightening in already tight regions. The U.S. Gulf of Mexico had a relatively soft quarter with a limited number of new requirements in Q1. However, with the majority of our Jones Act fleet already fixed through 2024, we haven't been affected by this dip in demand as some others might have been in the region. Lastly, in Asia Pacific, Taiwan and Australia were the key drivers of demand in the region in the current quarter, with several new contracts signed up to support drilling activity in Australia that will kick off in Q2 and continue through into 2025. Looking further out into 2026, we're starting to see several of the other NOCs in the broader region getting organized to increase drilling activity starting at the end of 2024 through to 2026, which bodes well for the region going forward. Overall, we're very pleased with how the market has continued to move in the right direction in Q1, and we fully expect that positive momentum to continue through the year and into 2025. With that, I'll hand over to Sam. Thank you.

Samuel Rubio, Chief Financial Officer

Thank you, Piers, and good morning, everyone. At this time, I'd like to review our financial results. I will focus primarily on the quarter-to-quarter results for the first quarter of 2024 compared to the fourth quarter of 2023. As mentioned in our press release filed yesterday, we reported a net income of $47 million for the quarter, or $0.89 per share. In the first quarter of 2024, we generated revenue of $321.2 million compared to $302.7 million in the fourth quarter of 2023, reflecting an increase of 6.1%. Active utilization remained steady at 82.3% in the current quarter and 82.4% in Q4. Average day rates rose by 8.3%, from $18,066 per day in the fourth quarter to $19,563 per day in the first quarter, which was the primary contributor to the revenue increase. Our gross margin percentage for Q1 increased to 47.5% from 47.2% in Q4. Gross margin for Q1 was $152.5 million compared to $142.8 million in Q4. Adjusted EBITDA was $139 million in Q1 compared to $131.3 million in Q4. This positive result comes as the first quarter is typically the weakest quarter in our fiscal year, largely due to seasonal fluctuations. Although seasonality remains, the increased average day rate more than offsets its impact. Vessel operating costs for the quarter were $167.6 million compared to $158.6 million in Q4. The rise is mainly due to higher crew costs as we transferred several vessels to our Australia region, which has a higher operating cost environment. Additionally, we faced higher drydock and mobilization days that increased fuel consumption, along with above-average crew training costs during this period. The uptick in operating costs elevated our vessel operating cost per marketed day to $8,480 in the first quarter from $7,894 per day in the fourth quarter. Looking ahead for the remainder of the year, based on our latest forecast, we continue to project total 2024 revenues to be between $1.4 billion and $1.45 billion, with gross margins expected at 52%. In this quarter, we sold 3 vessels from our active fleet for net proceeds of $12.5 million and recorded a net gain of $11 million on these sales. Our operating income for the first quarter was $81.9 million compared to $63.1 million in Q4, primarily due to increased revenue and gains on vessel sales, partially offset by higher operating costs. G&A costs for the first quarter were $25.3 million, $600,000 higher than Q4, mainly attributable to increased personnel expenses. For the year, we still anticipate our G&A costs to be around $104 million, which includes about $13.6 million in non-cash stock compensation. In the first quarter, we incurred $40 million in deferred drydock costs compared to $24.1 million in Q4. This year is expected to be heavy in drydock activity, particularly in the first half. During the quarter, we experienced 1,101 drydock days, which is 68 more than in Q4, impacting utilization by 6%. Full-year drydock costs for 2024 are projected to be $129 million. Additionally, we incurred $10.9 million in capital expenditures related to vessel modifications and system upgrades, expecting to spend around $25 million in capital expenditures for the full year. We generated $69.4 million of free cash flow this quarter, which is $8.4 million more than in Q4, mainly driven by cash generated from operating activities. Our $10.9 million in capital expenditures were more than offset by our $12.5 million in vessel sales proceeds. Working capital increased in the first quarter due to higher receivables from increased revenue. We will manage this investment closely as revenue continues to grow throughout the year. Cash taxes paid this quarter were $15.6 million compared to $7.3 million in the previous quarter, reflecting higher activity and final tax payments from prior year tax returns submitted in Q1. We spent $3.5 million repurchasing shares under our buyback program and bought an additional $12.5 million in shares in the open market after the end of the first quarter. We paid $28.5 million in cash taxes for employees instead of issuing shares related to vesting stock compensation. Year-to-date, we have utilized $44.5 million to reduce the number of shares in the market, resulting in a reduction of approximately 492,000 shares. We expect our cash flow performance to keep improving as the business accelerates. Now, I will focus on regional performance. Our Americas region reported an operating income of $10.1 million for the quarter compared to $16.2 million in Q4, with revenue at $64 million in Q1, down from $68.4 million in Q4. The region operated 35 vessels this quarter, two less than Q4, due to vessel transfers to other regions. Active utilization for the quarter was 76.5%, down 4.5 percentage points from Q4, due to increased drydock activity. Day rates rose 5.6%, increasing to $25,894 per day from $24,524 per day in Q4. The decline in operating income stemmed mainly from lower revenue due to fewer vessels in operation, slightly higher operating costs from unplanned repairs, and decreased utilization due to more drydocks. For the first quarter, the Asia Pacific region reported an operating profit of $14.8 million, up from $11.3 million in Q4, with revenue increasing to $47.8 million compared to $38.6 million in Q4. Utilization dipped slightly from 86.6% in Q4 to 84% in Q1, mainly due to higher drydock and immobilization days from moving vessels into the area. The region operated 21 vessels, two more than Q4. Average day rates saw a significant increase of 18.6%, rising from $25,378 per day in Q4 to $30,101 per day in Q1. The higher operating income resulted from increased revenue, partially offset by higher operating costs due to the addition of two vessels in the region. For the first quarter, the Middle East region reported an operating profit of $1.5 million compared to $2.1 million in Q4, with revenue remaining steady at $37.9 million compared to $38.1 million in the previous quarter. The region operated 43 vessels, two fewer than Q4. Active utilization slightly increased from 85.6% in Q4 to 86.6% in Q1. Day rates decreased to $11,108 per day in Q1 from $10,855 per day in Q4. The increase in day rates and utilization helped maintain revenue close to the prior quarter’s level, but operating income declined mainly due to unplanned repair costs and higher-than-average crew training expenses. Our Europe and Mediterranean region reported an operating profit of $14.8 million in Q1 compared to $13.8 million in Q4. Typically, Q1 sees lower activity in the area, but we experienced an increase in day rates from $19,061 per day in Q4 to $19,763 per day in Q1. Utilization fell by about 2 percentage points to 87.1% from 89% in Q4, influenced by more drydocks and unplanned maintenance days. Although utilization dropped, the rise in day rates allowed revenue to decrease by only $300,000 to $80.4 million compared to $80.7 million in Q4. The region operated 51 vessels in the quarter, the same as in Q4. The increase in operating profit for the quarter was largely driven by lower depreciation and operating costs while revenue and operating costs remained fairly stable. Our West Africa region reported an operating profit of $41 million in Q1 compared to $27.4 million in Q4. The market here remains very strong, with revenue increasing by 18.8% to $88.7 million in Q1 compared to $74.6 million in Q4. The region operated an average of 67 vessels in Q1, the same as in Q4. Active utilization rose to 78.3% in Q1 from 74.8% in Q4, facilitated by 214 fewer drydock days and 43 fewer mobilization days, enhancing utilization. Day rates also showed impressive growth with a 14.3% increase to $18,687 per day in Q1 from $16,356 per day in Q4. The rise in operating income from Q4 was primarily due to increased revenue and lower operating costs associated with fewer drydocks in the quarter. In summary, we are pleased with our Q1 results. Despite typical seasonal weaknesses, the rise in day rates and solid utilization more than compensated for these effects. We remain optimistic about the leading indicators observed in the quarter and will continue to focus on generating free cash flow and profitability.

Quintin Kneen, President and CEO

All right. Well, thank you, Sam. And Dee, let's go ahead and open it up for questions.

Operator, Operator

And your first question comes from the line of Jim Rollyson from Raymond James.

Jim Rollyson, Analyst

Impressive results considering the usual seasonal factors you've mentioned. Quintin, as we look at your leading-edge contract rates, it's clear they have been rising over the past two quarters, although the pace of improvement has slowed, which is probably typical for this time of year. Given the way things are shaping up for the rest of the year, especially during the busy season, I would like to hear your thoughts on how we should interpret the rate of change in leading-edge rates in light of current activity and the effects of seasonality.

Quintin Kneen, President and CEO

Jim, thank you. It is somewhat muted as you go through Q4 and Q1 because those are just the weakest periods of the year globally. So it doesn't surprise me that the rate of acceleration has leveled off a little bit as we went through these last 2 quarters. It's always hard to know. But generally, and we saw this last year and the year before, I anticipate that we'll see a ramp up in Q2 and Q3. There probably is a limit to what that number goes to over time. It's certainly grown substantially over the past 8 to 10 quarters. But I would look for more meaningful increases as we go through Q2 and Q3. What we've been seeing at this pace the last couple of years is we started at about $3,000 a year improvement in overall day rates, then it's been moving up to $4,000, now it's kind of on pace for $5,000. Right? So it has been accelerating about $1,000 a year on average over the last 2 to 3 years. It wouldn't surprise me to see that in '24 and into '25 as well.

Jim Rollyson, Analyst

Got it. That's helpful. And as a follow-up, Piers, you kind of went through what's going on geographically. And we obviously hear similar things in some of the different regions. I'm curious as you look out over the next 2 or 3 years, where do you anticipate the biggest growth regions to come from at this point?

Piers Middleton, Chief Commercial Officer

I think it's not much different from what we sort of say. I think all the areas are looking very positive. I think Asia Pacific looks like it will be strong going forward. We tend to see the NOCs in that region have been a little bit slower to pick up, but they're starting to talk about that. So I think that's one area. Obviously, Brazil has continued to be strong, and Petrobras continues to publish numbers looking out to 2030. So that looks like it will continue to be a strong area as well. I think it's all positive. So those are the sort of 2 standard areas. And Africa continues to look very positive as well down in Southern Africa in particular. There's a lot of work going on down there as well. So there's no bad spots at the moment is how I would leave it.

Operator, Operator

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

Fredrik Stene, Analyst

I want to touch upon 2 themes, starting with capital allocation and the capital structure. You've talked about getting a more streamlined debt structure. In my head, that would typically entail that you're grouping all your current facilities together maybe for larger, more long-dated bonds. Is that something that kind of has changed or your own thinking around how an ultimate cap structure would look like has changed since last time?

Quintin Kneen, President and CEO

Fredrik, thanks for the question. Good to hear from you. I'm going to kick it over to West because he's been doing a lot of strategy thinking for us from a debt capital structure perspective. One of the things that we're certainly focused on is creating a debt capital structure that's consistent with the needs of a cyclical business. So West, why don't you update him on the current thinking on that?

West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations

Yes. Sure. Fredrik, appreciate the question. So I guess the way we're thinking about it today is certainly, the debt capital structure today has been kind of pieced together here over the past years through refinancings and acquisitions. What we'd like to get to is a more appropriate debt capital structure for the cyclical business that we're in. We're in a position today where we feel we have the, I guess, flexibility to be opportunistic in evaluating ways to shape the capital structure going forward based on what we can observe in the market. The debt capital markets, both here in the U.S. as well as in your home market, appear to be relatively constructive. We aren't facing any near-term maturities or anything of that nature. So we want to be thoughtful and judicious about how we approach that, but we do believe that we are approaching that time where it makes sense to give some real thought to it. So the ultimate case and complexion of our debt capital structure, I still think remains to be seen. But it is an environment which we feel is supportive of our efforts to begin to evaluate that.

Fredrik Stene, Analyst

That's very helpful color. And on the back of that, I think if you alluded to in your prepared remarks, one of the ultimate goals here is to have more flexibility around how you spend the cash that you are generating and is going to generate at least on my numbers. But I see that you didn't, during Q1, fully utilize the share repurchase agreement. You accelerated a bit now in the second quarter. But I was wondering if you think now that the share price has actually approached $100 per share, that that's one of the regions where you would think that you would switch to dividends, for example, instead of doing share buybacks. So have you ever done any thinking around how you would allocate capital between dividends and share repurchases under the baskets that you're allowed to use currently?

Quintin Kneen, President and CEO

Yes. Well, I don't want to give anybody any indications of what we think our intrinsic value is, but it's certainly higher than where we're currently trading today. Obviously, we're very optimistic about the outlook based on just the EBITDA growth and the cash flow generation of the business. But you're right; there's a point when the value that you see from repurchasing shares is limited, but I also see the potential for acquisitions. Right now, I've been more focused on repurchases because those have been more valuable than acquisitions. However, acquisitions may become more attractive as we progress through the next several quarters. So we'll maintain a focus on all of those things. So I would say that if I had my druthers, I would still focus on value-added acquisitions. But there's going to be so much cash coming off of this business in the next couple of years that share repurchases, acquisitions, and dividends will all play a role.

Fredrik Stene, Analyst

Super. And final one, a quick one from me. First quarter was very good. I think ahead of everybody's expectations, which means that the step-up in kind of the second quarter is going to be a bit less maybe than what you previously anticipated. But on the back of this strong first quarter performance, do you think there's a chance that you could go above and beyond your guidance or that will now tilt at least to the high end of that guidance range?

West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations

Fredrik, it's West again. Look, there are certainly variables within the year, as you're particularly aware of in North Sea with anchor handlers and so forth. We spend a lot of time on our internal forecasting, as we've recounted that in prior calls and the robust approach, bottoms-up approach that we take to that. So at this juncture, what we communicated on today's call is what we feel comfortable committing to and articulating to the market.

David Smith, Analyst

Sorry if I missed the details in the prepared remarks, but I wanted to make sure I heard the guidance correctly for relatively flat vessel margin or minimal vessel margin improvement in the second quarter but then a 700 basis point step up to margin in the third quarter. If I did hear that correctly, is that largely due to the timing of contract rollovers? Is it more downtime and costs that disproportionately affect Q2 versus Q3? Just any color behind that ramp in the second and third quarter, please.

West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations

Yes, to directly answer your question, that is how we view the margin progression from the second to the third quarter. Several factors influence this. The rolling of contracts certainly plays a significant role. We did mention some drydocks that we moved into the second quarter to prepare for busier times later in the year. Additionally, a few vessels are mobilizing and there has been some unplanned maintenance. Overall, the combination of these factors easing and the continued rolling of contracts as we enter the third quarter materially impacts our margins.

Josh Jayne, Analyst

Maybe first, you talked about the Gulf being sort of a little bit soft in Q1, not necessarily Tidewater specific. But just on the conference calls of the drillers so far, it seems over the next 18 to 24 months, Gulf of Mexico should be a pocket of strength just with respect to rig activity going forward. Would you agree with that also? And how are you thinking about that market over the next 18 to 24 months?

Piers Middleton, Chief Commercial Officer

Yes. I think the drillers are right in their assessment. We are certainly observing that there was a slowdown in the first quarter, which we expect will carry into the second quarter a bit. There's an organizational aspect with some drillers that is affecting the positioning of rigs. However, we remain optimistic about the Gulf. It's common to see a slight slowdown in certain regions as rigs are repositioned. Therefore, we are positive about the future, even though we may experience a couple of quarters of reduced activity compared to expectations. This isn't significantly impacting us, as we anticipated it. We've remained in this area a bit longer than usual, but we don't foresee any long-term slowdown in the Gulf; it's more of a short-term concern.

Josh Jayne, Analyst

And then the other thing you mentioned on the short-term chartering strategy, I would assume that's not a broad brush when you talk about 9-month terms and things of that nature across the entire fleet. Could you talk about if there are opportunities within certain regions for longer-term contracts and how those conversations are ultimately going with your customers and how you view those, etc.?

Piers Middleton, Chief Commercial Officer

Yes. I mean our customers are still coming out for long-term tenders, and we're not precluding that. I think we've said before, part of the short-term strategy is not only about driving rates but also driving contract terms, which we feel are incredibly important in getting our customers to make more ex-bill contracts. But no, we're definitely seeing in certain regions, our customers wanting longer-term durations. We're just choosing to go a little bit shorter term because we still feel there's a lot of runway in this market globally, and we want to keep our optionality on our side of the fence rather than in our customer side of the fence, which you tend to do in a lower market.

Operator, Operator

Our next question comes from the line of Sherif Elmaghrabi from BTIG.

Sherif Elmaghrabi, Analyst

I apologize if my questions have been asked. In the press release, you called out the Q1 drydock was a 6% drag on utilization. How should we think about the case of drydocks for the rest of the year?

Piers Middleton, Chief Commercial Officer

Sherif, the line was a bit dropped, but it's about a drydock question. Is that correct?

Samuel Rubio, Chief Financial Officer

Yes. We expect utilization to be quite high in the first half of the year, but it will decrease in the second half. Instead of the usual 6%, we anticipate it will drop to around 4%, depending on the timing of the drydocks.

Sherif Elmaghrabi, Analyst

Okay. And then I'll go a bit more esoteric here. Is there an effect on the supply book from emissions regulations? For example, Europe's rolled out the maritime trade emissions trading scheme. I'm wondering if that's a consideration when you're looking for new work, what are the costs associated with emissions can be a little extra reduced rates in the North Sea, for example, or if operators are getting a little anxious about securing tonnage?

Piers Middleton, Chief Commercial Officer

No, it's mainly a European issue looking ahead to 2025 and later, specifically for vessels over 5,000 tonnes. Most of our vessels do not fall into that category, so it won't impact us. However, generally, our customers are focused on having the most fuel-efficient vessels and are constantly seeking ways to reduce emissions. That's why we have 16 hybrid vessels in our fleet, more than anyone else. We are also considering this on a global business level. Overall, we do not anticipate any significant pushback or material changes from governments worldwide.

Operator, Operator

Our next question comes from the line of Don Crist from Johnson Rice.

Donald Crist, Analyst

I just wanted to ask about the pace of new FPSOs coming out and what your kind of balance is today between drilling rigs and kind of production vessels and how that could skew demand as we kind of move forward throughout the year?

Piers Middleton, Chief Commercial Officer

Yes, as you may have heard, we are optimistic about the number of FPSOs being deployed. Looking ahead, Rystad has projected that we can expect over 40 FPSOs in the next five years, which is encouraging. Currently, our fleet is comprised of about 40% to 60% production work and 40% drilling work, though right now, it's more focused on supporting drilling. We also have some subsea construction underway. Perhaps Quintin can provide additional insights on this.

Quintin Kneen, President and CEO

Yes. It certainly varies over time. We don't always have a clean break between the two because when someone is chartering a vessel, they're not always just focused on drilling; there could be some production support elements in it over its contract life. But it will vary throughout the cycle. It's moving into a higher allocation towards drilling right now. So Piers was indicating 60-40. So the 60% production, 40% other, which is generally drilling rigs, FPSOs, offshore construction, and other elements like that. A year ago, that was probably 70-30. Okay. In the depths of the pandemic, it was probably 80-20. So it definitely weighs higher at this point in the cycle and it wouldn't surprise me if it stays at that level. It doesn't normally go over 60-40; so I mean we should be at about the maximum level of allocation at this point.

Operator, Operator

There are no more questions. I will now turn the conference back over to Quintin Kneen for closing remarks.

Quintin Kneen, President and CEO

Thank you, Dee, and thank you, everyone, for participating in the call today. We look forward to updating you again in August. Goodbye.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.