Tidewater Inc.

Welcome to the earnings conference call, fourth quarter 2018. My name is John, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press star then 1 on your touchtone phone. Please note the conference is being recorded. Now I'll turn the call over to Jason Stanley.

Thank you, John. Good morning, everyone, and welcome to Tidewater's earnings conference call for the period ended December 31st, 2018. I'm Jason Stanley, Tidewater's Director of Investor Relations, and I'd like to thank you for your time and interest in Tidewater. With me this morning on the call are our President and CEO, John Rend, Quintin Kneen, our Chief Financial Officer, Geoff Gorski, our Chief Operating Officer, and Bruce Lundstrom, our General Counsel and Secretary. After I cover a few formalities I'll turn the call over to John for his initial comments to be followed by Quintin's financial review. John will then provide some final wrap up comments followed by an opportunity for you to ask questions. During today's conference call we may make certain comments that are forward looking and not statements of historical fact. There are risks, uncertainties and other factors that may cause the company's actual future 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-Q for additional details on these factors. This document is available on our website or through the SEC at sec.gov. The information presented on this call speaks only as of today, March 1st, 2019, and 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. The reconciliation of GAAP to non-GAAP measures is included in last evening's press release. And now with that, I'll turn the call over to John.

Thank you, Jason. Good morning from Houston, everyone, and welcome to the Tidewater Call. Tidewater has marked many milestone years over its 60-plus year history, and we would most certainly count 2018 as one of those years. Following the successful closing of the merger with Gulfmark in November, Tidewater is once again the largest owner and most geographically diverse OSV operator in the world. The all-equity combination maintained the company's strong balance sheet and further significantly scaled up our presence in key strategic markets, including the North Sea and the U.S. Gulf of Mexico. We are well positioned to capitalize on growth opportunities as the OSV sector recovers. Since the deal closed in the fourth quarter, our combined team has made substantial progress executing our integration plan, merging the best systems and practices of both companies as effectively as possible. This includes welcoming many of the talented Gulfmark employees to Tidewater as we assemble the best and brightest team to prepare for the industry recovery. A key benefit of the merger was the opportunity for both companies to realize operational and cost synergies associated with running a larger fleet of vessels utilize an existing broad geographical footprint. With only a couple of months as a combined company, we have made swift and significant progress towards achieving our cost synergy targets, including reducing our duplicate shore-based footprint around the world. Five facilities have been consolidated so far, including our corporate headquarters here in Houston. You may recall that when we announced the deal to combine with Gulfmark, we committed to achieving significant cost reductions. bringing our historical combined G&A run rate of 145 million down to 100 million by the fourth quarter of 2019. Based on our success to date, we are committed to reducing that run rate further to 90 million and we don't plan to stop looking for additional opportunity to reduce costs throughout the organization. From an operational synergy standpoint, we have also had several early wins. Underline the benefit of expanded opportunity set for the more diverse vessel fleet. Several legacy Gulfmark vessels have now been contracted in regions supported by Tidewater and key customer relationships have provided additional opportunities resulting in higher margin contracts for three vessels supporting geotechnical projects in Guyana, West Africa, and Northeastern U.S. wind farm developments. Our customers remain in strong position. Their cash flow is at record levels. Commodity pricing, while volatile, remains constructive and service provider rates remain depressed. With the substantial overcapacity in the OSV space, operators also tend to have a greater degree of choice when it comes to selecting service providers and their associated equipment. As you would expect, well-maintained, recent vintage, high specification vessels tend to be the preference. Older vessels, particularly those that have been stacked for any period of time, tend to be offered a smaller opportunity set. As the length of time the vessel has been stacked increases, particularly to a point of being stacked for three years or more, the likelihood of that vessel attaining work in the future reduces dramatically. Taking into account these factors, our focus has been on high grading the tidewater fleet to maximize its earnings potential while strengthening our ability to capitalize on an improving market and ensuring the best suitability for servicing our customers' needs. This process includes a continued review of our stacked fleet as well as evaluation of asset acquisition opportunities. Post-combination, we have continued to proactively maintain a sizable fleet of 31 modern, high specification, what we've been referred to as Tier 1 vessels in line for reactivation in our stacked fleet. Our strong cash position allows us to be prepared for these reactivations as opportunities that make economic sense to do so arise. As we are now entering to what, by my count, is year six of the downturn in the offshore sector, lower specification, older stack tonnage becomes an increasing liability and is less worthy of the cost of reactivation. With this being the case, we remain heavily focused on disposing of these older, uncompetitive assets. Tidewater once again led the industry in vessel dispositions in 2018, with a total of 38 vessels sold to noncompetitive peripheral markets and Recycling Yards. Based on industry data we have, this equates to approximately 20% of all vessels departing this sector in 2018. Since 2012, Tidewater has sold a total of 217 vessels, 85 of which were sold to recycling yards. Our target for 2019 is to dispose of approximately 40 additional uncompetitive vessels from our stacked fleet. It is worth noting that there may be another driver encouraging additional OSV fleet attrition in 2019. Every five years, industry regulatory agencies require special surveys to be performed on active OSVs. This process involves dry docking the vessel at a substantial cost averaging between $1.5 and $2 million. The last significant wave in new vessel deliveries took place in 2014, resulting in a large number of these vessels, those that are currently active, requiring these special surveys this year. Based on data available to us, we estimate that this may impact over 250 vessels or approximately 13% of the global active OSB fleet in 2019. With many of our peers having little to no liquidity available to complete these surveys, they will be faced with the decision whether to invest in maintaining valid class status with uncertain contract coverage or stacking vessels. The likely outcome, and indeed this is already taking place, is that customers will increasingly be asked to fund dry dockings or at the very least commit to higher rates with sufficient contract term to justify the ongoing investment to maintain a vessel in active status. On the vessel acquisition front, I mentioned that we continue to evaluate opportunities to further grow our high specification fleet. In December, we completed the purchase of two 2012 vintage 4,000 deadweight ton 800-meter square deck PSVs at a price of $5 million each, plus $1 million for surveys, outfitting, and mobilization costs per vessel. While on the topic of vessel acquisitions, I will note that we completed the sale of our sole MPSV, the 2010 built tidewater enabler, in the fourth quarter for $22 million. We will continue to review additional asset deals that will be accretive to fleet quality. While we are proud of the fleet we have and continue to build, operating this fleet safely is our highest priority. Tidewater's employees globally know that no matter what market challenges and pressures we may be dealing with, my direction to them is that they are never to make changes at the expense of safety of our men and women operating around the world, offshore or shore base. Through the implementation of both existing best practices and systems from Tidewater and Gulfmark, and the expanded use of the latest platforms for our software partners, our team remains focused on the ongoing commitment to operational excellence through the digitization of our process as we work to improve our efficiency, maintain our industry-leading safety performance and continuously improve the quality of our service in a cost-effective manner. Few in the industry expected the commodity price volatility we saw in the fourth quarter. However, despite this volatility, our customers have not indicated any changes to their exploration and development plans for 2019. In recent months, we have had more constructive discussions with customers regarding paying for vessel mobilizations and related costs, as well as supporting vessel reactivations, and in several instances, we have been successful in including these fees for our customers' account, as was standard practice prior to the downturn. I mentioned earlier that we have maintained the top tier of our stack fleet in preparation for reactivation. When we can make the business case to do so, In fact, we have completed, or are in the process of completing, the reactivation of 10 vessels to support additional contracts in Nigeria, Angola, Middle East, Guyana, and Thailand. These recent contract awards represent a term commitment of 26 vessel years, excluding several multi-year options. Our team not only remains focused on building backlog, but also improving upon the quality of that backlog. It can be difficult to remain disciplined while tendering in challenging and frequently oversupplied markets, but it is critical that we continue our efforts to advance contract economics and terms wherever possible and decline to commit to contracts that don't meet these basic requirements. As usual, we have provided detailed fleet statistics by region for the quarter and earnings release. I will highlight one of these statistics for the moment. and that is that the fourth quarter marked a notable improvement in our quarterly average active vessel utilization at 82%. This is the highest level for the Tidewater OSB fleet since the beginning of the downturn. Before we move on to cover our financial results, I would like to take this opportunity to thank Quinn Fanning for his years of service at Tidewater. Quinn has been a key member of the Tidewater leadership team and his expertise, vision and Professionalism were instrumental in navigating the company through the restructuring process, once again placing Tidewater in a strong financial position and laying the groundwork with the merger with Gulfmark. Quint, on behalf of all of us at Tidewater, thank you very much.