Tidewater Inc.

Thank you for standing by. My name is Mandeep and I'll be your operator today. At this time, I'd like to welcome everyone to the Tidewater Q2 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Wes Goethe, Senior Vice President of Strategy, Corporate Development, and Investor Relations. You may begin.

Thank you, Mandeep. Good morning, everyone, and welcome to Tidewater's second quarter 2024 earnings conference call. I'm joined on the call this morning by our President and CEO, Quentin Nee, 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, referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we are making during today's conference call. Please refer to our most recent Form 10-K and 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 7th, 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 release located on our website at tdw.com. And now with that, I'll turn the call over to Quentin.

Thank you, Wes. Good morning, everyone, and welcome to the second quarter 2024 Tidewater Earnings Conference Call. Second quarter revenue nicely exceeded our expectations, driven by stronger than anticipated day rates, with printed day rates exceeding our forecast by nearly $800 per day. The second quarter marked the highest ever printed day rate for Tidewater and the highest gross margin percentage in 15 years. This is a notable milestone that highlights our efforts to hydrate the fleet through the disposition of older, smaller vessels and through the acquisition of younger, higher specification vessels over the last few years. We believe the fleet is better positioned to realize the benefits of a healthy, structurally sustainable offshore cycle and to deliver even higher day rates, better margins, and significantly greater cash flow than at any point in the 68-year history of tidewater. The second quarter is typically characterized by favorable weather conditions and is often the quarter during which global activity begins to pick up. And this is exactly what we saw this quarter. Day rate improvements were broad-based with each of our vessel classes and each of our geographic segments posting sequential day rate improvements. The continued day rate strength across each of our vessel classes and geographic segments speaks not only to the robust vessel demand, but to the persistent tightness in vessel supply in each of the regions in which we operate, and when taken together, a global tightness in vessel supply. This global tightness in vessel supply is the primary driver of the day rate performance we continue to realize. New-built vessel activity remains muted, and demand for vessels looks to improve over the coming years, which is indicative of a continued favorable supply-demand fundamentals over the intermediate to long term. We've talked about this in the past, but it seems appropriate to mention again that we re-forecast our business every week. Sam and I have been doing this for over 10 years. We often get ribbed for doing this, but the industry moves quickly, and keeping a weathered eye on the movement in the supply and demand balance by boat class and by geography is important to maximizing the company's return on investment by optimizing the geographic distribution of the fleet. Over the past month, we have seen shifting in the forward outlook. that we want to discuss with you today, because as a result of that shifting, we are bringing our full-year revenue guidance down by $25 million, or just under 2%. We now see the third quarter as slightly improved from the second quarter, and the larger step-up in performance that we were originally anticipated to begin in the third quarter to now begin in the fourth quarter. Wes will walk you through the updated guidance. Pierce will give you insight into what is driving the shift in offshore activity from the third quarter to the fourth. as well as how we execute on our geographic diversification strength when activity in a region suddenly shifts. And Sam will give you insights on how we see our operating costs going down over the next two quarters. In addition to the above, West is going to speak to you about our capital return philosophy and our thoughts on improving our debt capital structure. Pierce is going to speak to you about the overall strength in the market. And lastly, Sam is going to walk you through the consolidated numbers. All of these factors, the improvement in our debt capital structure, the overall strength of the market, combined with the added benefit from geographic diversification and the reduction in both operating and dry dock costs as we move into next year are setting us up for an even stronger year of free cash flow generation in 2025. Subsequent to last quarter's earnings release, we repurchased about 17 million of shares in the open market. That brings our year-to-date share repurchases to about 33 million. And since the inception of the buyback program in the fourth quarter of 2023, we have repurchased nearly 68 million of shares in the open market. In addition to the open market repurchases, we used 28.5 million of cash in the first quarter to buy shares related to the tax obligation on equity compensation from employees in lieu of those employees issuing their shares into the open market. So over the past three quarters, we've used 96 million of cash to reduce the share count by about 1.3 million shares. Wes will provide some more detail on our views on return on capital in his prepared remarks, but we remain committed to using the cash flow generated from the business to pursue capital allocation strategy that maximizes the return to our shareholders. We continue to pursue acquisitions, but thus far deals that are clearly value accretive to our shareholders have not materialized. There are several opportunities to acquire fleets that are strategically relevant to our existing fleet position, but the return on investment is currently higher from the repurchase of our own shares. Our focus for acquisitions remains on fleets located in North and South America, but we remain opportunistic in all geographies. In summary, we are very pleased with the performance of the business during the second quarter. Each of the various elements of demand for our business are poised to continue to build. Drilling, subsidy projects, floating production infrastructure, and support of existing production are all expected to grow materially over the next few years, and each of these activities requires offshore vessel support. We plan to continue to take advantage of a supply-constrained vessel market, in a rising demand environment to continue to push day rates and drive earnings and pre-cash flow growth, and we are well positioned to do so. And with that, let me turn the call over to Wes, Pierce, and Sam for additional commentary and our financial outlook.

Thank you, Quentin. Following Quentin's comments on return of capital, we are pleased to announce that our Board of Directors has authorized an additional $13.9 million of share repurchase capacity. The new authorization brings our total capacity under the program to $47.7 million. The authorized share repurchase program and remaining capacity represents the maximum amount permissible under our existing debt agreements. To date, we've discussed that share repurchases have provided for flexibility as we evaluate competing capital allocation opportunities, and that our return of capital philosophy has been discussed in the context of competing capital allocation opportunities. Both of these concepts are still relevant. However, given the near-term outlook and the structural factors influencing the longer-term fundamentals of our business, we believe that the pace of our current capital returns over the past three quarters is sustainable on a long-term basis while maintaining the optionality and financial wherewithal to pursue additional opportunities. Turning to our debt capital structure, We continue to evaluate the best path to achieve our goals of establishing a long-term, unsecured debt capital structure, along with a sizable revolving credit facility. Achieving this goal not only establishes a more appropriate debt capital structure for a cyclical business, but provides for added capabilities as it relates to M&A or other capital allocation opportunities. We continue to monitor the debt capital markets and bank markets, which remain constructive. However, we are approaching any debt capital structure augmentation opportunistically, as we have no near-term maturities, we feel comfortable with our current leveraged position, and we feel as though we have the ability to act on any capital allocation opportunity that may present itself. During the second quarter, we entered into 21 contracts for a composite leading edge term contract day rate of $28,754. The average this quarter declined 6% sequentially, is we had a number of our smallest vessels come off of long-term contracts early in the Middle East. Day rates are not uniform across vessel classes, nor are they uniform within a given vessel class. In this quarter, we had a relatively large number of contracts with the smallest vessels within our smallest vessel classes entering into new contracts, bringing down the quarterly composite average day rate. It's worth noting that our large and medium classes of PSBs and large and medium classes of anchor handlers all had high single to low double-digit rate improvements sequentially. The average duration of new contracts entered into during the second quarter was just under five months, the shortest average new contract duration since we began providing this figure. Looking to the remainder of 2024, we are updating our full-year revenue guidance to $1.39 to $1.41 billion and a 51% gross margin. We now anticipate that third quarter revenue will look similar to the second quarter as the number of drilling campaigns slated to commence in the third quarter have now moved into the fourth quarter, along with increased dry dog days in the third quarter compared to our previous expectations. We do expect a nice counter-seasonal step up into the fourth quarter in line with our prior expectations as delay projects commence and as our dry dog days decline materially. Given the revised Q3 revenue guidance, We now expect gross margins to be up about one percentage point in the third quarter and now expect a fourth quarter gross margin exit rate of about 58% and increase from prior expectations. Our contracted backlog currently sits at about $568 million of revenue for the remainder of 2024. We currently have $317 million of revenue contracted for the third quarter with 77% of available days contracted. Further, we have $251 million of revenue backlog for the fourth quarter, with 68% of available days contracted. Approximately 75% of our remaining uncontracted days in the fourth quarter are associated with our large PSVs and largest classes of anchor handlers. With particular exposure in our Africa and Europe and Mediterranean segments, areas that typically command the highest day rates, and where we see projects commencing in the fourth quarter. The risk to our backlog revenue is unanticipated downtime due to unplanned maintenance or dry docks. With that, I'll turn the call over to Pierce for an overview of the commercial landscape.

Thank you, Wes, and good morning, everyone. On this call, my objective is to give more nuance around our chartering strategy and why we're still very optimistic about the overall outlook for the OSV market and our place within it. We feel that as the only high specification OSV company with a truly global in-region footprint, we remain very well positioned in the various geographies we are located in as demand continues to improve and as vessel supply additions remain muted. Two things to bear in mind as we focus on the rest of the year is one, to remember that not all our regions are created equal, although none are less important for it. And two, with a short-term chartering strategy geared more towards drilling and construction projects, we have some short-term risks related to delays in project commencements. In Q2, our average charter length for new contracts remain just under five months. which was lower than previous quarters and lower than we had planned for at the beginning of the year. Our expectation was that now we would have signed up to support a number of drilling campaigns, primarily in Africa, Mediterranean, and the Caribbean, which would have all started in early Q3 and gone through into 2025. In reality, what has happened is that all these projects got pushed to the right and are now expected to start late in Q3 or the expectation of them going through later to 2025. On top of that, all those projects will be supported by our two larger PSV classes, which, as Wes mentioned earlier, are our highest earners in the fleet. So projects pushing to the right in one geography is bearable, but when you have multiple projects in multiple regions pushing to the right, the ability to leverage our regional diversification is more limited, which is what we're seeing happening in Q3. The good news, and this is key, is that we aren't seeing any cancellation of projects outside of the previously announced cancellations in Saudi Arabia. And we aren't seeing any decline in day rates across any classes of our vessels. In fact, we are seeing the opposite with both ourselves and our regional competitors prepared to take some short time utilization pain while still pushing rates. As an update to the ongoing situation in the kingdom, as it pertains to our own fleet, we had been in discussions on five of our vessels operating in country. and last week we were informed that all five would be off-hired immediately. Within the week, our local commercial team had found work for all five vessels at higher day rates to customers in the wider Middle East region. We will suffer some idle time in Q3 as these vessels reposition, but our outlook for 2024 for the performance of this region is intact, as any idle time will be off-step by higher than previously expected day rates in Q4. A very impressive effort from our team in the Middle East. which also shows why it's so important to have a strong local presence to be able to react quickly to all situations. When situations like this occur, there's more value in waiting for the work to commence than to reposition both specifically. Looking out over the rest of the year and into 2025, we remain confident in the long-term demand of our customer base in each region and that our fleet mix in each geography is appropriate. And if a customer needs additional vessels, then it is only right and proper that our customers should pay to move them to a different region and to pay to move them back at the end of the project. In fact, in Q3, we will see several of our larger vessels moving to different regions to support the slip projects I mentioned earlier so that they can be in place to support drilling programs in late Q3, early Q4. A short-term charging strategy does hold some risks, but with boots on the ground in each of the regions we operate and therefore better granular detail on our customer project needs, we feel very confident that the short-term delays we are forecasting in Q3 is mainly due to delayed project commencement. Overall, we're very pleased with how the market has continued to move in the right direction in 2024, and that we expect that positive momentum to continue into the rest of the year and into 2025, with all signs being that we see continued improvement in demand in all the regions in which we operate. And with that, I'll hand over to Sam. Thank you.

Thank you, Pierce, and good morning, everyone. At this time, I would like to take you through our financial results. And as in previous calls, my discussion will focus primarily on the quarter-to-quarter results of the second quarter of 2024 compared to the first quarter of 2024. I will also discuss some of the operational aspects that affected the second quarter and how we see the rest of the year playing out from an operating cost standpoint. In addition, this quarter I will move away from the detailed regional results discussion and summarize them at a higher level. As noted in our press release filed yesterday, we reported net income in the second quarter of 2024 of $50.4 million, or $0.94 per share. In Q2, we generated revenue of $339.2 million compared to $321.2 million in the first quarter of 2024. an increase of 5.6%. Average day rates increased by 8% from $19,563 per day in the first quarter to $21,130 per day in the second quarter, which was the main driver for the increase in revenue. Offsetting the increase in day rates was a decrease in utilization from 82.3% in the first quarter to 80.7% in Q2. This was due to higher dry dock and idle days. Our gross margin percentage for Q2 increased modestly to 47.7% from 47.6% in Q1. Gross margin in Q2 was $161.9 million compared to $152.5 million in Q1. Adjusted EBITDA was $139.7 million in Q2 compared to $139 million in Q1. Vessel operating costs for the quarter were $176.5 million compared to 167.6 million in Q1. The increase is due to a variety of items, including higher R&M costs related to several high-cost breakdowns, higher crew costs as we moved a couple of vessels into Australia, where crew cost runs higher than our other regions, fuel costs related to just under 2 percentage point of utilization loss due to idle days as compared to the first quarter, as vessels were either in between contracts waiting on customer inspections, or vessels on spot market. In addition, we incurred a loss of 1% of utilization due to an additional time in dry dock. In the quarter, there were a couple of unique items that occurred that we do not normally consider routine operating costs. These items include $1.1 million write-off of capitalized mobilization costs due to a contract termination in the Middle East that Pierce just referred to. and a 1.7 million customs duty settlement in West Africa. In Q3, we don't anticipate either of these items. Therefore, we anticipate our operating costs to decrease by about 2.8 million. Dry dock activity is still heavy in Q3, but in Q4, we do see utilization increasing and costs decreasing as a result of a much lighter dry dock schedule. Furthermore, we anticipate an increase in utilization as a result of fewer idle days, as projects that Pierce mentioned would have started in Q3 will have commenced. We anticipate a further reduction in operating costs of about $12 million. The decrease in idle and dry dock days will translate to lower R&M and fuel costs. In addition, we will be moving a couple of vessels back out of Australia, which will significantly decrease operating costs as well. I would now like to provide additional information that has impacted both our balance sheet and income statement in the quarter. In the quarter, we sold one vessel from our active fleet for net proceeds of 2.3 million and recorded a net gain of 2.2 million. G&A cost for the second quarter was 26.3 million, 1 million higher than Q1 due primarily to higher professional fees and some bad debt recoveries that we benefited from in Q1. For the year, we expect our G&A costs to be about $107 million, which includes approximately $14 million of non-cash stock compensation. In the second quarter, we incurred $40.1 million in deferred dry dock costs compared to $40 million in Q1. We anticipate for the third quarter dry dock costs of about $39 million and about $14 million for the fourth quarter. Dry dock costs for the full year 2024 is expected to be about $133 million. Dry dock days affected utilization by nearly 7 percentage points during the second quarter, and as we move into a lighter dry dock period, utilization will naturally improve. In Q2, we also incurred $6.4 million in capital expenditures related to vessel modification, ballast water treatment installations, IT, and DP system upgrades. For the full year 2024, we expect to incur approximately $26 million in capital expenditures. We generated $87.6 million in free cash flow this quarter, which is $18.2 million more than Q1. The free cash flow increase was primarily attributable to cash generated from operations and strong customer collections in the quarter. Through June 30th, we have made $25 million in principal payments on our senior secured term loan and $1.5 million on our supplier facility agreement. We spent $29.4 million to repurchase shares under our announced share buyback authorization. Year-to-date, through June 30th, we have used about $33 million of cash to reduce the number of shares in the market, and that has reduced the count by approximately 348,000 shares. Also, in the first quarter, we spent $28.5 million in cash to pay taxes on behalf of employees in lieu of issuing shares of stock related to vesting stock compensations. We conduct our business through five segments. I refer to the tables in the press release and segment footnote and results of operation discussions in the form 10-Q for details of our region's results. To summarize the results, our region's day rates improved by 8% in the quarter, led by the Americas and Asia-Pacific regions, which were both over 9%. Remedies were higher in all regions except Middle East, which slightly declined. Gross margins increased from 47.6% to 47.7%. We expect margins to increase 1% in the third quarter and for a significant improvement in the fourth quarter due to the previously discussed reduction in operating costs and improvement in utilization. In summary, we are very pleased with our Q2 results. We do recognize the changes that will affect Q3. However, as anticipated previously, we are expecting Q4 to be a strong quarter. We remain encouraged by the main drivers that affect our results. The continued strength and day rates across each of our vessel classes, strong demand and tightness in the vessel supply will enable us to continue to generate strong free cash flows and profitability. With that, I will turn it back over to Clinton. Thank you, Sam.

Monteep, if you would please open it up for questions.

Thank you. We will now begin the question and answer session. If you dialed in and would like to ask a question, please press star 1 in your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again. If you're called upon to ask your question or are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. Our first question comes from the line of Jim Rolson with Raymond James. Please go ahead.

Hey, good morning, everyone. Quentin, you know, obviously a little disappointing when things get pushed to the right versus what was planned, but out of your control, obviously. And it sounds to me like that hasn't really changed. So, you know, timing will push into 4Q startup and you're obviously kind of suggesting a pretty nice pop in results starting in 4Q. But correct me if I'm wrong, it doesn't sound like that has changed anything about how you're feeling about the outlook for 25 and even beyond. And in response to that, I'm also curious just what you think the risks are to, you know, the startup in 4Q. Could that get pushed? That kind of stuff. But it sounds like just big picture things are still tracking just with a little bit of delay here.

That's absolutely correct. And it's similar to what you may have heard on other conference calls throughout the earnings season, but things are certainly shifting to the right. And it's more about logistics and supply chain than it is about economic decisions related to offshore activity. And I think that's fairly certain and well understood inside the industry. And so what we're seeing is a little bit more difficulty coordinating and getting started But once it gets started, I don't see it's going to slow down. I don't even see when it's going to slow down. 25 or 26 still look just as optimistic as they always have.

Got you. And then on the leading edge rates, obviously the composite number was kind of mixed skewed lower. But correct me if I'm wrong, if I look across the different categories and look at the rate of increase in leading edge this quarter, versus like the past couple of quarter increases you know you were kind of fourth quarter first quarter you know you were up three four percent collectively and this quarter that number was probably you know double that in the high single to low double digits you know correct me if i'm wrong there and and also just on the middle east maybe a little bit of context of how much of that's been recontracted just so we can think about that mixed impact going forward

No, absolutely. I'm going to give it over to Wes because he studies this more deeply than anybody. And then Pierce could probably comment a little bit more on the Middle East contract role.

Yeah, thanks, Glenn.

Good morning, Jim.

So as it relates to the first part of your question on the leading edge day rates for the larger class and medium classes of the PSVs and anchor handlers, that's a fair characterization. The The, you know, continued momentum in those rates, I think, was quite good. Again, you know, kind of high single digit to low teens, which is, you know, a pace that I think we're pretty pleased with broadly. So, the pace of improvement for those vessels, I think, is, you know, perhaps in line, if not a little bit ahead of what we had expected. And so, to the second part of your question, there was a mixed element here. And as I mentioned in my prepared remarks, we had some of the smallest vessels in our smallest vessel class happen to re-contract in the same period. Okay. And so when you look at that, it was, you know, nearly 30% of the contracts were in these, the smaller end of our smaller vessel classes. And that's just the vagaries of having a wide variety of vessel types in our fleet. So, you know, that's just kind of the way things work this quarter. But if you look at where the larger vessels are that are being driven by the drilling activity, by FPSO activity, and so forth, there's continued momentum there that we feel very, you know, comfortable with.

Got it. I will turn it back and look for more questions. I appreciate the answers. Thanks, Jim.

Our next question comes from a line of Greg Lewis with BTIG. Please go ahead.

Hey, everybody. Thanks, and good morning, and thanks for taking my questions. You know, thank you for the guidance, you know, and the commentary to kind of get us there. But I was hoping, you know, I realize what we got to get through Q3 before we start thinking about Q4. But, I mean, you did mention that kind of, you know, that kind of, I guess, 58% gross margin exit rate in Q4. You know, as I think about that, you know, in terms of sequencing, I'm assuming that's more of like a December exit than, say, a Q4 exit. And then just, you know, to kind of help us understand that a little bit. And then, you know, I guess, Quinton, I mean, it's definitely bullish times in the PSV market. But of course, any kind of commentary around what those gross margins look like in that 58% range versus maybe where you've seen them in previous cycles and just kind of curious on your views around, give us a little bit of a history lesson there. Thanks.

Okay. Well, we're going to answer this in a team format, Greg. And Greg, it's good to talk to you again. So it is an interesting time. Because the other element that I would add to the discussion in context of how the gross margin is going to be accelerating over the second half of 24 is that this is a very heavy dry dock year. So we've been spending, I think we spent over $80 million in the first two quarters on dry docks. I think we got another 30 some odd million in Q3. And then once those boats that are in dry dock free up and go back onto their contracts, that naturally just increases revenue in the fourth quarter. So we have this benefit that's naturally going to pop in Q4, which is all these boats that have been in dry dock are finally free, they're clean, they're ready to go, they're up and running, and they're moving on to these new contracts that Pierce had alluded to and Wes had also talked about. And then in combination with that, we've had a relatively high level of fuel expense related to moving those vessels into dry dock, pulling them out. So supplies and consumables and repair and maintenance have been relatively high. And then we had a couple of unusual items that Sam talked about in Q2, a couple of settlements of a customs case in West Africa, and then you know, another element related to the write off of the Amazon.

Yeah, right. Oh, yeah.

Yeah, I'm going to talk about that one in a second. So we had a write off of some accrued rope costs in the Middle East. So we have costs coming down substantially, we got the boats freed up to go to work, and then we have the work coming in in Q4. And that's what's driving that pop in margin. Okay. Now, as it is really to like the margins of, you know, where they go, you know, where they peak. I hope we don't see a peak, quite frankly. I hope it keeps on going. But it's very natural for me to see a business of this type that's earning its cost of capital getting a 70% margin over time. And Greg, before I leave it, there's something that I don't know if it came out as well on the prepared remarks. I just want to talk about it and use your time. The really nice thing about tidewater and the footprint that we have was illustrated a lot by what happened in the Middle East during the second quarter. And we saw a little bit even roll into the third quarter. And you saw the ARAPCO decided they were going to reduce activity levels. They ended up giving vessels back to us. And when they give those vessels back to us, then we have to write off the mold costs associated with when we move those boats into it. And that's what Sam was talking about, that one penalty. But then the team is able to get all the boats back on work really quickly. And so to me, it's just a really exciting time as things shift a little bit. But it goes to just managing a little bit of the geographic diversification to optimize the outcome. And this was just another good example of it. And I think as we roll to Q4, you'll see a little bit more of that as Pierce repositions those boats to take advantage of newer contracts.

All right, Noah. Hey, that was super helpful, everybody. Thank you for the time, and have a great rest of the summer. Thank you. Thanks, Greg.

Our next question comes from the line of Frederick Steen with Clarkson Securities. Please go ahead.

Hey, Quinten and team, hope you are all well. I want to follow up a bit on one of the previous questions and the commentary that you gave around the leading edge rate this quarter. As you say yourself, all rates across regions and asset classes are up. You exemplify that with some leading edge rate examples for the larger vessels as well. and you told us that you have signed 21 contracts so i was just wondering in terms of you know contracting uh volume and and that mix did you have you know more vessels larger vessels to sign this quarter that could have brought that average up again or uh was this just you know arbitrarily a quarter where you only had 21 vessels to to to recontract and that's why we got this uh higher volume of the lower vessels. So any additional commentary on that would be super helpful.

Yeah. Hey, Frederick, it's Wes. Good morning. As I kind of alluded to, to some degree, again, the vagaries of having 213 discrete assets that we contracted for various lengths of time at different points in time. And so in any given quarter, you can have a mix that shifts one direction or the other. We did mention, as we talked about in the Middle East, we had a number of vessels come off of the long-term contracts early. That is a bit unusual. And so you had a higher preponderance of vessels recontract than perhaps normally would have, right, if they would have gone to the end of their contract lives. So I don't know that there's a rule of thumb. Could there have been a few more boats, larger boats, to your question, that could have contracted but for the project delays? Yeah, perhaps, but I think it's just important to remember that with 213 boats, seven different vessel classes that we talk about, and quite a few boats spread across those classes, you can just have periods in which the mix, if you will, is a little bit different than the distribution of the fleet. So I don't know that there's a rule of thumb here that we can give to you other than to say that from time to time you can have these variations in what's contracting during a given time period.

I absolutely agree with that. It's more about if One thing is that you have a higher number of smaller vessels coming or being recontracted, but also if you have a negative effect on the other side, if there was, again by chance, just a quarter where you had fewer available larger vessels to recontract, which would also have a skewing effect on that average number.

Absolutely.

You also mentioned a five-month average contract length. Do you think on average you'll go much lower than that going forward? I guess for you guys, it's all about managing, having some baseline coverage and also being able to play the market. But if you have to recontract half of the fleet two times each year, it's a lot of recontracting to do. So any thoughts on that?

well i think i'm going to let pierce talk to this as he's doing this on a day-to-day basis he can give you a sense for what he feels about the momentum and day rates and so forth yeah um hi frederick um this was a you know a little bit lower than we would normally expect i mean i think previous courses we've been at nine months or also is where we've been going as a general uh concept across the whole fleet we're still at 18 months but you know we're starting to see um and slightly longer term contracts i mean drilling is is generally short term anyway and and um construction as well so i think this was actually to jump on a bit of west points from earlier you know you just have quarters sometimes which are just you know a little bit different and i think you know that was the case with q2 we ended up with some smaller vessels um recontracting and some of the contracts were just a little bit shorter than we'd normally normally see. But I don't think overall our strategy is going to change. We're still very positive about the long term for this market. So that gives us opportunities to continue to drive rates. But yeah, we'll see how we go through the next few courses. But at the moment, I think we're just happy where we are at the moment. And we're still very positive for the market going forward into 25 and 26.

This is super helpful. And the final one for me, which relates to day rates going forward. I think you're right in the report that you obviously remain optimistic about the outlook for 2025 and that the current supply and demand factors should allow you to maintain the pace of day rate increases that you have achieved over the past year. And I think for the average rate you reported this quarter, that's around 21,000 dollars per day. Second quarter last year was 16. So you've seen like a $5,000 per day improvement over the last year if you look at the second quarter specifically. Are you saying that the second quarter 2025 should expect average reach to be around $26,000?

All right, Frederick, you're getting a little ahead there. I mean, I think it's, you know, that $3,500 to $4,500 range per year. I think that's what we can push it. And that's about where we've been at the last year and a half or so. I don't want to get everyone too excited. But, yeah, I do believe that that momentum that we're talking about is there, and we continue to capitalize on it. And I look forward to delivering on it, so.

I framed the question like that on purpose, but I guess around 4K per day is also acceptable.

All right.

Thank you so much, guys. That's all from me.

Our next question comes from the line of David Smith with Pickering Energy Partners. Please go ahead.

Hey, good morning. Thank you for taking my question. hey most of my questions have been asked but i i wanted to make sure i understood the comment about higher expected q3 dry dock days if if that was just shifting q4 schedules to q3 if if it's a little bit higher expected downtime for vessel um and if this impacts your your average utilization expectation for 24.

Hey, Dave. How are you? This is Sam. So the Q3 expectation in dry dock, it's a mixture. We had some push into Q3 that were supposed to be done in Q2 just because of the contracts, the way they were, you know, kind of being worked. But then you had some in Q4 getting pushed into Q3 just because, again, some of the contracts, the way they're shifting, it gives us the opportunity to get those dry docks done sooner. So it is a combination of pushing in and pushing out. The overall Q3 amount of days is probably around 300 extra days in the quarter than what we originally anticipated.

Okay, but not really have a higher expectation of dry dock days for the year, it sounds like.

There will be higher expectation of dry dock days in the year, yes. Again, some of it was because of some of the delays that we have seen in the dry docks, but again, just because of the timing, the way they're getting pushed.

I appreciate it. And then I wanted to make sure I understood correctly that Q3 revenue is expected roughly flat in Q2 because I think that would require a roughly 18% revenue increase in Q4 to hit the the new guidance midpoint of $1.4 billion?

That's right. We expect Q3 revenue to be roughly flat. As we said in the prepare remarks, a nice step up in Q4. And that Q4 expectation kind of qualitatively around our revenue is not dissimilar to what we anticipated previously. And I think if you think about it conceptually, The projects that we anticipated to start in Q3 that would have run into Q4 are now starting late Q3, early Q4, which should allow for that revenue to be realized in that period.

All right. I appreciate it. I'll turn it back.

Thanks, Dave. Our next question comes from a line of Josh Jane with Daniel Energy Partners. Please go ahead.

Thanks. Good morning. Morning. Hi, Josh. So the first question that I wanted to ask is just about the margin improvement, not only as we think about Q4, but going into 2025. A lot of the items that you mentioned that are going to positively impact Q4, so notably the dry docks coming down, utilization higher, et cetera, maybe rates go up a little bit. Those things are going to be in play in 2025 as well. So just as we think about going into next year, and the 57%, 58% vessel operating margin, that should sort of be a baseline as we move into 2025. Is that a good way to think about things first?

Well, we haven't given full guidance on 2025 yet, but we will do that on the next call. But directionally, you're correct. So here's a couple of things that we have said that dovetail into what you were saying. which is, you know, as day rates continue to improve, I don't see them pulling back in 25. So that spread and that margin that we're building on should continue to grow. The other thing that's really unique about moving from 24 to 25 is 24 is our heaviest dry dock year in the five-year cycle, and 25 is going to be our lightest. So the vessels that have been off higher in the first half of the year, first nine months of the year, and the money that we've been spending on repairing the vessels and fixing them up, we won't see nearly that amount as we go into 2025. So there's going to be more vessel uptime, there's going to be fewer costs, and that should be very indicative of what we're expecting to see in Q4. So let me leave it that way, and then I'll give you a full rundown when we do the next quarter call.

Understood. And you alluded to it earlier, some of the contracting delays that we've seen and things being pushed to the right in offshore drilling world. Maybe you could talk about the reasons for the delays again. You spoke that it wasn't necessarily cost driving it. I was hoping you could go into a little more detail there and what you're seeing with respect to why the delays are happening. And then also a follow-on to that is if you could just frame your expectations for

offshore rig activity maybe over the next uh 12 24 months and you know looking forward would be would be great thank you all right well i'm gonna kick that one over to pierce since he's dealing with them on a regular basis to talk to you a little bit about anecdotally what he feels is is pushing things to the right and and he may have a sense also of the rig market build as we go through the next couple of years uh so let me let me kick it over to him and then i'll follow up

thank you um yeah i mean for a project point of view we saw a number of projects just getting pushed to the right because i think it's quinton alluded to um in his comments earlier that's uh logistics and supply chain um project planning perhaps uh from our customers was not as uh speedy as perhaps they had envisioned and i think one or two customers don't really want to be specific on areas but one or two customers couldn't get ahold of drill pipe, for instance. So they end up, you know, saying, oh, we're going to have to delay the project or we, you know, things like that, or we couldn't get ahold of a rig. And it's just planning more than anything else. And just everything got pushed to the right. I think there was also in a couple of areas, there was a lack of maybe some personnel sort of issues to get organized in time. And the project just got slipped, you know, 60 to 90 days. So we didn't see any cancellations, so nothing to worry about, but Q4 definitely looks very positive on that. I think in terms of just the rig activity, when we look out to, obviously we follow it very carefully in each of the regions we're in, there's a little bit of movement at the moment, and it's not absolute in each of the regions we're operating in. But I would say our customers, the IECs now have got themselves better organized. And I think they've got pretty good visibility for 25 and 26 in all the regions. And I think, you know, we'll see a big uptick in sort of activity in everywhere we operate, you know, in all the sort of main areas. So, you know, we're very positive. I think 24 was shuffling around more than anything else in the planning. ends up being a bit more planning than was expected. So visibility-wise, we're pretty positive as we go into 25 and 26 with the rig in all the regions we're in.

Great. Thanks. I'll turn it back.

Our next question comes from the line of Don Criss with Johnson Rice. Please go ahead.

Morning, gentlemen. I wanted to ask, about the M&A market. In past calls, you said that y'all were actively looking at a number of deals that were potentially out there in the market, but given higher utilization across the industry, it seems to me that the bid-ask spread is widening, not narrowing. Any comments around that?

I don't want to say too much because the best situation that you illustrated still remains, right? But obviously we're looking to make sure that any deal we do raise value to our shareholders. And for us, we can make a tremendous amount of money with the 200 plus vessels that we have. The day rates that we're talking about, the margin expansion, there's a tremendous amount of value that's going to be created as we roll through 25 and 26, just with the existing fleet. So when I look at potential acquisitions focused on a particular geography or a particular boat class or ideally both, and they fit nicely into our fleet and fit nicely into our age profile. Because everybody has been optimistic about the market and they have been trying to demand more than I think that they're worth at the current time. And so we're just saying discipline and uh you know i think in the long run things will get done but i don't want to uh the last thing i want to do is overpay for a bunch of assets you know and so uh we're just we're just i would suffice it to say the words being very price disciplined but we're continuing to be very active in the market okay i appreciate that color and just one more for me you know it it seems like you're going to generate

significant free cash flow over the next 12 to 18 months. And just your thoughts around what you would deploy that capital into. Would it be share repurchases or would you just kind of build cash or maybe pay down debt, et cetera? Just your thoughts around uses for that free cash flow.

Well, we're not going to build cash, full stop. we'll certainly keep cash as necessary for liquidity and so forth. I don't think that we are over-leveled at this point in the cycle. So, you know, as a result, that cash is either going to get deployed into value-free acquisitions that we were just talking about, if I can get them done, if we can get them done, or we were to turn that money into shareholders.

I appreciate the call. Thank you. I'll turn it back.

Our next question comes from the line of Magnus Andersen with Fernley Securities. Please go ahead. Hey, guys. Thanks for taking my question.

So a follow-up on the leading-edge rate that you talked about earlier, if you adjust for the lower spec Middle East vessels to the leading-edge rate to a representative distribution What would that level be, or could you provide some information regarding the increase to leading edge rate for the lower spec classes?

I'm not sure I understand the first part of the question, but I think what's relevant is it relates to those vessels that recontracted in the Middle East, as we noted in the press release, you know, the rates that we realized by re-contracting the vessels quickly were on average 29% higher. Now, it was off a much lower base, right? Because again, these are the smallest vessels and one of our lowest day rate regions. But I think what's important is that even in that scenario where vessels came off early, we were able to get them re-contracted quickly at meaningfully higher day rates. It just so happened that given the distribution, And given the nature of these assets, they brought down that leading edge day rate on a composite basis. But there are elements to that situation that we believe are constructive. Again, a significant improvement in day rates for vessels that were terminated and quickly recontracted. So I think that speaks to the strength of the market in general. I think that speaks to our regional diversification, our ability to have the on the ground capabilities to get those vessels recontracted quickly. There's, I think, some positive elements there. But again, just given the nature, as we talked about, not all rates are uniform, even within vessel classes.

That just happened to weigh down the leading edge direct for the quarter. Okay. Thank you for the call there. That's all.

That concludes our Q&A session. I will now turn the call back over to Quinton Neen for closing remarks.

Well, thank you, everyone, and we will update you again in November. Goodbye.

This concludes today's call.

You may now disconnect.