Yet Another Value Podcast - Tidewater's management on the offshore inflection $TDW

Episode Date: January 6, 2023

The management team from Tidewater Offshore (TDW) comes on the podcast to discuss Tidewater and why we could be at an inflection point for the offshore space.   TDW's investor relations page (with investor deck): https://investor.tdw.com/overview/default.aspx  December OSV market report (from seabrokers): https://www.seabrokers.no/wp-content/uploads/SEABREEZE_December.pdf Chapters  0:00 Intro  2:50 What's different in the current cycle?  8:00 Why supply is so limited in offshore  13:10 What is TDW seeing on the demand side?  26:00 Discussing TDW's valuation and where earnings can go as rates rise  32:30 TDW's potential utilization 38:10 EBITDA to free cash flow conversion  43:00 What do day rates look like right now?  47:10 How has TDW set up their fleet to take advantage of rising rates?  51:10 But seriously.... why is this time different?  57:30 How low would oil prices need to go to start impacting offshore drilling demand?  59:00 TDW capital allocation going forward

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They are moving incredibly quickly with many new features and datasets. As a bonus note, blog readers will know that I run a monthly, well actually buy monthly deep dive series sponsored by TECIS. In them, I go deep into industries and companies with fast, in questions using Teague's expert calls. I'd encourage you to check that out if you're interested in seeing how expert interviews can help you learn more about a company and industry. Hello, and welcome to the Another Value Podcast. I'm your host, Andrew Walker, and if you like this podcast, I mean a lot, if you could follow, rate, subscribe, review it wherever you're

listening to it. With me today, I'm happy to have the management team from Tidewater, the CEO, Quinnine, and the CFO, West Gocher. guys how's it going hey it's going great quite frankly i'm feeling better now than i've probably felt in five to seven years so well i know it's a happy new year not anything else west how's going yeah i was going to say happy new year happy to be on hey really happy to have you guys on uh first podcast of the new year so happy new year to you guys and all the guests uh let me just start this podcast with a quick disclaimer just to remind guests nothing on this podcast as investing advice. Obviously, we've got a management team on. We're just going to be talking

about the company, the industry, and everything overall, but people should do their own work, consult a financial advisor. This isn't financial advice. Anyway, the reason I'm having you guys on is the offshore space. It's going through, it seems to be hitting an inflection point. It's been a very popular, a very popular space and thesis in the value investing in devalue investing circles over the past year. I've been spending a lot of time on it. And I wanted to have you guys on because, you know, a lot of value investors look and they see offshore boats. They remember how bad the last cycle was. They say these are commodity assets. You always get burnt just when you think it's going on. So it's a really interesting story. I wanted to have

you guys on to talk about the industry overall, Tidewater specifically, and maybe help investors think about why this time might be different, even though those are famous last word. So I've rambled a little bit. I'll pause there and just if you guys want to do the high level Tidewater thesis, and then we can go into lots of different parts of it. Yeah, absolutely. And, you know, And we're very mindful of Sir John Templeton's words there because, you know, we are in a cyclical business. And it's always nerve-wracking when you hear at this time it's different. And the reality is it's not different in the sense that the business is no longer cyclical. But there are factors that are different this time that we should consider as we go through it.

And maybe while I'll step back, even back to 2014, and talk a little bit about what's, you know, what the industry's been through. so that can help set up what the industry is going to be going through over the next several years. So, you know, if I go back to the end of 2014, there's a large build cycle. It really started in 2009 with a bunch of easy money coming into the world post the great financial crisis. You saw a lot of building coming in out of Asia, principally China, which was state-sponsored. And really, it was all driven because of the fact that boats of our category made a tremendous amount of money in the run-up between 06 and 08. So 2006 and 2008. And there hadn't been a build cycle really since the late 80s. And so as a result, there was a lot of money going into

our vessels in that time frame. There was a little pause in the great financial crisis, but it was quickly eradicated by just the inflow of money. And then we saw another build cycle it started in about 2011. So we had just a lot of boats on order and had been slowly building even throughout the 90s. There hadn't been a serious correction in our industry. And as we got to the end of 2014, you know, what we saw was that there were more boats on the water

and on order than the industry could absorb, even before the industry took a dive in 2014. So going into the downturn that started, call it November 2014, we were already in the oversupply mode, and we had 20% of the fleet on order. So, you know, we just had this massive crash that happened beginning in 2015. It took a while to get to really hit the industry participants because because of the dynamic that was in a place at the time, you can still lock up boats in two. 2013 for five years and even in 2014 at decent rates. Decent rates at that time were about $22,000 a day. So you can deliver a new boat, put her to work for $22,000 a day for five years.

That was a good deal at that time. And so, you know, the industry, you know, slowly began to crash because it had a little bit of backlog cover and you saw it crash in the 2016, 2017 time frame. Most of the businesses went through Chapter 11 restructuring or some form of restructuring in 2017 and 2008. And then, you know, we slowly just started to wean through all of these long, live assets. They're long, live assets, and they just take a long time to correct. Meanwhile, the rig industry, which is a, you know, a factor in our demand. We can talk about the demand equation shortly.

but the rigs were more diligent about scrapping than the boat companies were. And as a result, they scrapped more rigs than we scrapped boats proportionally. So we were just always under the curve from an oversupply standpoint, if you will. And as a result, it's just taking us a long time to get back into a place where we feel that we are in balance from a supply and demand standpoint. Now, go back to 2015, there hasn't been a vote order since 2000. I mean, there's stuff that got delivered in 2015 and 16 that was kind of most of the way through their construction process when the crash occurred in 2014. But as a result, there's just anything on order. And, you know, we've been very good about attritioning vessels and put into the scrapyard.

A lot of participants in our industry haven't. You know, the holding costs for a boat isn't that significant. But these boats have been deteriorating for five or six years. And these boats are designed to be constantly maintained. So when you don't have them on the water and be constantly watched at by mariners and everybody turning valves and greasing valves and all the good stuff that is necessary, keep a boat in good repair, they begin to really accelerate in their depreciation. So we've seen that, you know, we've seen that begin to really take hold.

And as a result, the supply has finally gotten down to a point where, You know, we're seeing traction in all the regions and in all the vessel categories. Now, when you get down to, you know, Sir John Temple, there's a warning about it's different this time, but it's not different in the sense that you can change the forces of supply and demand in this industry. There's just too large for any one particular company, but you could play into it. And so what's happened is because there's been this large underinvestment in vessels, and now the industry is turning and they're trying to bring the offshore industry back to life, which they are. What we're finding is that there's not enough of the supply chain.

Some of it is the pandemic supply chain problems, but a lot of it is the fact that shipyards have gone away. You know, most of the people that are, you know, attending to our type of vessels have moved on to other types of vessels. And so as a result, there's no infrastructure left to rebuild this industry at the pace that the offshore activity levels are increasing. So, you know, if I wanted to order a boat today, one is, you know, there's not that many yards. These yards that I was talking about in China, a lot of them have consolidated and gone away, and they're not looking to build our vessel again because they got burned so bad. But even the major yards in Europe or here in the United States,

it's two and a half to three years before I could get something delivered. So the lead time on what to deliver is much more significant than it's been in the past. But there's other factors, too. Because of the energy transition, there's a real question in boat owners and build shipbuilders' minds as to what is the right vessel to build? These are long-lived assets or 25-year assets. And so if I'm going to build something with propulsion technology today that involves a heavy hydrocarbon output, you know, it could be more, it could be absolutely much faster than we've seen in the past. So there's been a real hesitancy to put anything into a build boat at this point.

So we're watching other shipping industries to see how they handle it. You know, our boats are different in the sense that they're not, you know, they don't go for long straight voyages, if you will. You know, they're not going from point to point from China to the United States or other places in Europe. And as a result, you know, they're quick. quick-on, quick-off boats, and they don't lend themselves to easily to LNG because of where they're located. They don't lend themselves to any other alternative technology at this point. So as a result, the impetus for ordering new ships is very low. And we haven't seen any, even in the recent build-up in activity in the offshore.

So I'll stop there for a second, Andrew, and just see if you want. I guess I was just going to say, I guess I quickly out of that is beyond some of those, I guess, physical limitations or obsolescence limitations, the economic rationale is still quite in there yet, right? And so you have some of the underlying economics of what a new bill would require today, we're not even back as strong as the market's been through 22 and kind of where we sit today and kind of what we're hopeful for moving forward. the rates still aren't even back to where they need to be in order to justify that new build. And so that's an additional kind of obstacle. And beyond that, the capital formation piece isn't really there. So I think historically, there had been state-sponsored entities that would help finance vessel buildouts. Either it was just kind of in their DNA or it was some sort of national strategic imperative or something of that nature.

And that's kind of vanished. And beyond that, the traditional bank markets aren't very supportive. The capital markets are there to an extent for us, but we're quite large. And so, you know, when you add up a variety of these factors between some of the physical and technological limitations and the financial and capital limitations, there's just a lot of headwinds that we think are, you know, kind of prohibitive to new vessels entering the market. any, you know, foreseeable time frame? No, that's perfect. So I guess that there's a lot there. You guys covered a lot of the questions, but there are a lot there that I want to dive into a little bit later. So I think we did a nice overview of the supply side. And I guess I should have mentioned at the

beginning that, you know, this is basic economics, right? Like boats are pretty much a commodity. You've got supply and demand. And if demand is really high and supply is really low, rates have to tick up quite a bit to eventually incentivize, as you said, eventually the rates have to go high enough to hopefully incentivize some new builder or something. But if it takes two and a half years for the new bills, if it takes three years, like rates can go quite high in the meantime. Now, if we're into 2018, oil prices are low, lots of boats out there, not a lot of exploration, lots of supply, no demand rates will be low. So we're kind of talking about the supply demand picture of the supply very tight, very limited right now. Seems like it's going to be the

way. And we've just had over the past year, if you've been following the energy markets, everyone knows oil prices have gone up. Supply demand is really tight. You know, oil prices remain around 7580 despite what, 400 million barrels of SPR going offline. So I think we've covered supply for a little bit. I want to, I'm going to come back to a lot of that. But why don't we start talking about demand? You know, the demand here is offshore drilling and everything. And I'll just flip it over to you. What are you guys seeing on the demand side? Okay. So let me walk through the demand equation as we see it, and then we can talk about those factors as well, that we're just alluded to the macro factors. So the largest part of what we do is really just production oriented

support. So there's, call it 5,000 points out there on the ocean somewhere. There are platforms or other installations that need visiting on a regular basis. And the ships will go out there, they'll do maintenance, they'll repair items. If they're manned, they'll bring supplies and so forth. And as a result, you know, a big part of what we're doing is just a milk run. You know, we're just going around the offshore oil field, dropping off supplies, you know, helping people, you know, administer maintenance on the existing assets that are out there. Maybe you call that your install days, if you will. And then, you know, that's probably 60 to 70% of what we do, you know, depending on where we are on the cycle. But what really

drives us to peak utilization and therefore peak day rates is the drilling activity. So everybody watches the drilling activity, and there's observable metrics, you know, the number of drilling rigs working, and their boat's working, people always correlate them. But if you don't consider that alpha component of, okay, there's a base level of activity, you'll end up overshooting on the demand side and, you know, both up and down. So I just, I just frame the demand equation in that way. So as we were going through, I call it 2000 and so. Things were taking a long time to correct, right. And so I'll take you back to end of 2019. And then I'll go through the pandemic and then talk about where we're at today.

So end of 2019, I started to see a little bit of increase in day rate utilization, right? Things had attrition long enough where you were starting to get some pricing leverage in certain geographies. So in boat classes that are in demand, so the larger vessels. So let me stop here and say, generally people prefer larger vessels. They're commoditized, of course, but at the same time, you know, bigger is better. Yeah, more option value. They're usually the most modern vessels. They often have the most safety equipment.

They're more fuel efficient. They're more carbon efficient. So people just generally like newer assets. They're more reliable, right? So for all those reasons, people like new. boats. Newer boats cost more. But in the downturn, when everything went to cash flow break even as the equation works out, it didn't matter if it was a bigger boat or a smaller boat. They're all going out of essentially the same price. So, well, you know, I'll take a bigger

boat. So everybody started getting used to using a larger vessel. And so that vessel, the larger vessel was the format that always went to work. And maybe you didn't get the day rate you wanted, but didn't have to worry about utilization. It was those smaller boats where you really had to worry about utilization and whether they are going to deteriorate. And to my point earlier, if the boat's working as being constantly maintained and therefore the likelihood that it's going to live its full 25 to 30 years is more likely. So it is all those good things for the larger boats. And so as we went through the end of 2019, I started to see the rates really begin to take up

on the larger boats to the point where people were starting to look at the the next class of boats called that the 800 square meter deck so the large boats call a thousand square meter deck let's go down to 800 square meter deck starting to see those prices increase now as we got into the first quarter of 20 the pandemic hit and it's just okay you know all bets were off you know and then it was just literally any port in the storm right you just had to get your boats off higher we didn't have to get them off higher you had to get them to a port you had to get the people that are on the boats off higher, so you had to get your salary costs down. And so, you know, the, you know, 20 and 21 largely was just about kind of restructuring, getting the boats,

you know, off higher, getting them into a poor, getting them put into a layup state, and then getting them relocated to where they need to go once the industry recovers. well you get later into 21 and then really in the first part 22 people started coming back to life the oil price was rising and people were who had deferred maintenance so okay the other thing that happens is anytime there's a downturn people start deferring maintenance so that the milk run that I was talking about people just like okay we're not going to do this that or the other we're just going to save as much as we can we need a boat but maybe we're not going to spend as much money on equipment and repair And so, yeah, go visit it, but don't bring over any supplies. Don't spend any time there. What we got into doing was just kind of just visiting and inspecting assets general. As things began to come back to life and the oil price began to rise in the latter part of 19, so this is before the Ukraine conflict, people were like, well, crap, you know, these prices,

let's get everything working. So, you know, you started to go out and visiting these production-oriented facilities and then begin to optimize them. So if a generator had gone offline or if something else had broken over the last few years, since 2014 sometimes, well, you go get that fixed. And then you enhance the production capability of those particular assets, and you start generating more money. And so a big part of the activity levels that we first saw, even in the beginning of 20 and the 19, but also kind of end of 21 and the 22, was just this increased level of maintenance activity and kind of catching up on deferred repairs and making that's right.

And so all of that began to increase at the end of 21 into 22. And oh, man, now it's not just the big boats that were in short supply. It was the 800 square meter decks. And you started to see rates in all the regions starting to increase. I'm like, okay, well, now we're getting back to where we were pre-pandemic. And then we have the conflict in Ukraine. And there was a real mind shift when that occurred in the first part 22 where people got focused on energy security again. And so they're like, okay, where are we going to go?

And, you know, throughout the end of 21 and into 22, there was a unique phenomenon. Most of the time when the oil price begins to rise, the first groups that go back to work, are the majors and super majors. So Exxon, BP, Shell, others, you know, they're usually the most reactive. And so the most reactive areas are in the North Sea and the US Gulf of Mexico. And we didn't see that this time. Well, we saw where the major is holding back, and I attribute to that to a bit more capital discipline on their side, perhaps a little bit more focus on renewables.

And as a result, we saw the NOCs dive in. So we saw Saudi Ramco, we saw Petrobras. You know, they had early and really in 20 and in the 21 continued an activity level increases. And as a result, those areas of the world really began to utilize more vessels more quickly. So they had been rising. And then as we get into the 22 and the energy security theme really took hold, everybody started jumping in. So all the geographies started to put boats back to work. and put routes to work as well.

As a result, activity levels have been increasing nicely ever since. So, you know, we're in a nice position as we come into the end of 22 and begin and into 23 that really we haven't seen in over seven years where, you know, people are, it used to be, all right, just to give you an example, it used to be, you know, we'd have boats at the docked good way to know to work. Nobody would want a boat long term because why lock up a boat long term when you can just call out a vote as necessary? You know, now people are trying to put boats to work five and seven, ten years even as a result. We, you know, the EMP companies, whether they're NOCs or major, super majors, are worried about not having a vessel. So the vessel scarcity

is a real issue today. And so, you know, that has the effect of people holding on the boats longer, further tightened up the market, right? So we're in this nice phase of as we go into 23, all of, you know, virtually all of our boats are working, well, you're going to have to correct me, but there may be five times that aren't working. Yeah, we have a few still held for sale, but essentially. Yeah. Yeah. So, you know, so all the boats are working, you know, the day rate acceleration has just been, you know, it's been phenomenal, quite frankly. but as excited as I am about the performance of the business in 22, we're still not earning our cost of capital.

I mean, I still couldn't justify building a new vessel today. I'm just much better off than I was previously. And so, you know, relatively speaking, we're in a good position. Perfect. Wes, did you want to add anything on the demand picture, Wes? Or I know we'll be talking about the EBITI number in a second, which I'm sure you'll be jumping in. Yeah, no problem.

I mean, you know, one thing that we look at and, and, and, you know, we'll be talking about. And I think plenty of market observers who, you know, watch this podcast look at is what, you know, the expectations for offshore spending is going to be. And, you know, we followed that through a variety of resources. And, you know, as Quinn said, the rate movement in 2022 was pretty astounding. We saw rates move within a quarter, what we typically would have expected them to move over the course of a given year.

Okay. So really substantial moves. But when you look at, what, you know, offshore capital commitments, announced capital commitments are over the next few years. 2022 was a nice year. But, you know, the expectation is that as we get through 23 and 24, offshore capital commitments are nearly expected to double. Okay. And so if you're in this kind of supply constrained environment and you have a, you know, you talked about the two curves meeting earlier and you have that demand curve really move out, then there's only one way to kind of

satisfy that imbalance and that's your price. And so, you know, when we look at what's been announced and what's interesting, if you look at some of the numbers put out by some of the larger, you know, kind of industry research folks out there, they actually don't even include some substantial spending activity that's expected to occur in the Middle East. I think that's just definitional in terms of how they capture these expected dollars. But, you know, it's a substantial move up over the next few years. I think that's driven by just the late in economics of where commodity prices are. The energy security construct that's happening. And frankly, I think a capital rotation back away from onshore back to offshore that, you know, I think a lot of these

companies have traditionally been engaged in and that they're organizationally set up to pursue. So that piece of the demand story is is pretty exciting. Perfect. Okay. So I think we've covered the supply and demand story. And hopefully people see, you know, supply limited right now. Demand appears to be increasing. And you kind of get like almost, I don't want to say parabolic, but maybe an exponential thing. You know, when utilization for industry goes from 50 to 60, you're not really going to see rates sick up. 60 to 70, but as things get tighter and tighter,

the rates start really creeping up because, look, if you're drilling offshore, you're all in cost of a barrel is probably $20 to $30 per barrel. It foils at 70. If you're going on a boat, if you're going on OSV from, you know, 15K per day to 20K per day, that's pretty much a rounding error in the grand scheme of things.

So as things get tight, you can really start paying up for these vessels. So I want to talk earnings power real quick. And I think that valuation earnings power will be great. So, you know, as we're talking, we're talking January 4th, the stock price is about $34 per share. That's about a $1.8 billion market cap. You've got a little bit of net debt about $50 million at the end of Q3. So you can call it $1.8, $1.85 billion market cap, whatever people want to do. Q3 earnings are $50 million. As we've talked about, rates have been going up a lot. Utilizations have been going up. So I don't want to focus on like a last 12 months number.

I think a lot of some people do that and you'll you'll see a higher valuation. But if I just annualized Q3, you'd be trading about eight and a half times EBDA, you know, 50 million, about 50 million EBDA, so 200 million annualized. So eight and a half time, that's not that expensive. These actually free cash all nicely. But what I really want to focus on is kind of where the puck's going, right? Where earnings can go. And you guys have a great slide.

The last investor deck you'll publish was September. I'm looking at that. It's slide 12. you guys start talking about, hey, if we can get to an $18,500,000 per day, day rate, that would get us to $666,000 in annual EBITA. You know, so again, EBITDA translates really nicely into free cash flow. We're talking about three times EBDA, maybe three and a half times free cash flow at these levels, if you can hit that rate.

So I want to pause there, Wes, I'll probably tell us to you, Quinn, and you can jump in, but, you know, walk me through that valuation number, why the 666 million number can get in there, the assumptions behind that 18 and a half thousand day rate. and that EBITDA number. Yeah, sure. So that, you know, and we can talk about this separately, but that was an exercise we went through after we acquired Swar Pacific offshore in April of 22, which, again, we can talk to separately.

That's been a good transaction, some really nice boats, larger boats, newer boats, and a part of the world, or in two parts of the world that we're excited about, primarily West Africa and Southeast Asia. But we put, and again, we can talk about that separately, but we put that together to say, look, we're coming off of a period, and you kind of alluded to it earlier, looking backwards in a cyclical industry, sometimes has its limitations, right? If you're on the precipice of a recovery, then looking backward isn't terribly instructive as to what the earnings power in our case of a given fleet can do, or of our fleet can do. So we said, okay, let's look at

this combined fleet, and we contemplated the synergies that we identified through the Swire acquisition that we've periodically updated the market on and said, let's look at where the vessel, where our fleet is from an OPEX perspective, what we expect to bring out of the system, both from a G&A and OPEX perspective on the synergies. And, you know, given that fixed cost base, because I think there's one important element to note about our business is what I think people typically think of as variable costs of labor and things like this are really fixed for us in that, you know, if we were, if a vessel is 50% utilized or 100% utilized, we're paying our crews the same. Now, you can have some incidental repair maintenance and so on and so forth,

but conceptually speaking, we're 100% operating leverage business. So we said, let's take that fleet where we were at the time. And it's instructive still. And, apply different day rates to it. And so we looked at kind of $1,500 a day increments. And the reason for that is historically, that was what we generally expected to achieve over the course of a given year. I mentioned earlier that we saw day rates expand more than that. I think in Q2 of this past year, our day rates expanded by $1,900 a day. Right. So pretty, again, speaking to the, the, the, the, the amplitude of rate expansion. So we kind of staggered it that way to say if at a given utilization level and a given day rate, what are our earnings look like? And for each incremental move in day

rate, how does that drive our earnings capacity? And the way kind of the math worked out of our fleet of just under 200 vessels in those kind of utilization and day rate scenarios is for every $1,500 a day of day rate movement, it's about $100 million of incremental EBITDA. And the reason why we kind of stopped it, if you will, about $18,500 a day was that was what kind of the peak day rate that we achieved back in 2014. It was actually a touch closer to 19,000, but round numbers, that's about the peak we were at. So we said, okay, we'll show it there kind of, you know, putting perspective of what tidewater at that time generated. And so that kind of, you know, puts out this $670 million. it was kind of by happenstance it was 666.

I don't know if there was anything. I saw that. I was like, I don't know if you want to put that number into it yesterday, especially something that's been as cursed as offshore for this law. Right. Maybe it should toggle some, have it round up a little bit.

But in any event, that's the math. But what's interesting is I mentioned that's what Tidewater at the time did. So since that time, so, you know, almost a decade ago now, there's been a variety of things that have happened to the fleet. One is, is we've sold a lot of older, smaller vessels that at that time, or just, even now, just generate, you know, a lower day rate.

Now, they may have lower costs and things like that, depending on where they are and so forth, but just nominally had a lower day rate. And also since that time, so we've kind of shrunk the, the fleet or kind of optimized the fleet for the larger, newer vessels that Clinton talked about earlier. And additionally, since that time, we've acquired new vessels. namely through the Swire acquisition that are larger and bigger and more equipped. And so, you know, I guess the best way to say it is the fleet today is not the fleet in 2014. And we would argue that we have a much higher spec on average, much larger on per vessel basis, much larger vessel. And we think that, you know, the average day rate in a similar market environment would be meaningfully

higher than 18 and a half again for purposes of that presentation and for that analysis we wanted to just kind of you know put it in something that people could sink their teeth into to say okay they did this back in 2014 let's put it there but the you know the fleet is not the same now as it was then and so we we we are much more positive on kind of the aggregate day rate power if you will the fleet now than then we would have been as compared to where we were in 2014 and I want to go into a couple different components of and again people can go look this is the september uh what is it the paredo deck that you guys did it's on the tidewater website yeah yeah it's on there yeah i just want to dive into obviously the day rate i think people can get used to that but there is one other part which

we don't have to spend too much time but just so it's there's two things people are going to look at a there's a big utilization uplift number and again i think that's mainly just normalizing kind of the dead time but you just want to talk to the utilization you assume and why that's a reasonable assumption in there? Yeah, and I'll let Quentin jump in here as well. But at that point in time, so again, this was done in, I guess it would have been early Q2 of last year. And we still had a lot of vessels that we were selling. So we had kind of total utilization, active utilization. The active utilization is, you know, our utilization for non-laid-up vessels. And so we had a variety of vessels laid up at the time, and we've pretty well worked all those out. And so I guess

at this point in time, it's useful to think of just utilization, just the writ large, right? Just kind of your normal utilization number. At that point, our utilization was lower. It has certainly come up throughout the course of 22, as you can see, you know, in our public filings. And so it was to say, look, we think what is probably a realistic, you know, utilization level in a strong market is around 90%. We were somewhere in the high 70s at the time and we said, okay, if we're showing this, you know, gross scenario, it's not just going to be day rate because you pointed out earlier, utilization kind of has to come up in order for day rates to come up. And so we said, let's take that to 90%. That's probably not our fully maxed utilization. I think practically speaking,

across a fleet of, you know, 200 vessels or so that we have when you think about dry docks and just frictional unemployment in between contracts, downtime for repair and maintenance, the practical utilization that we could probably achieve our fleets around 92, maybe 93%. Okay, so not quite fully utilized, a full effective utilization, but in close, right? So we said, let's put it there because we're showing this market uplift scenario. And so that was kind of the concept is that we're not saying we're just full bore, just totally sold out, but a very strong utilization environment that would, you know, I think support these rate increases that are contemplated on that page. And obviously you guys are getting close there. I'm just looking at Q3, total utilization

78 percent, active utilization, 84 percent. And that that's going up from everything I've seen in the industry. So obviously, you're already starting to get to that utilization. Yeah. And as I alluded to, and I think we talked about in the last call is, you know, the difference there between that total and active is we did have, yeah, we did have a, you know, a handful of vessels that we're still assets held for sale or otherwise laid up. So that's the delta there is kind of these non-active vessels. Shortly, we should expect, you know, as we talked about in the last call, we should expect that total and active utilization to converge as we basically just have our kind go-forward fleet that we're happy with and that we're going to work, you know, moving forward.

Perfect. Did you want to add anything there? I just want to set free cash flow. Go ahead. Yeah, yeah. Let me add a few things about just the psychology of the market to give you a little bit background on how the industry operates, and then we can go into free cash flow and all those other good things. But, you know, I get a question sometimes that's along the lines of, well, supply and demand is so tight, why don't you just push all the day rates up to, you know, $30,000 a day or something like that? And unfortunately, the nature of a highly fragmented industry, especially one that's been kind of abused over the past seven years, you know, you've got to get all of your industry participants to be pushing at the same time.

right so what i am encouraged about is what west alluded to which is the acceleration in day rates that we're seeing in this up cycle is much faster than what we've seen in previous up cycles uh you know you you mentioned the Pareto conference you know the groups of Pareto and Clarksons and a group called West Shore as well they all have available online you know the spot and term day rates for our types of vessels right and if you look at the the current term rates for vessels that are going to work in like the Southern Caribbean and sometimes in the North Sea as well, you'll see that they are approaching or even higher than the peak day rates in the last cycle already. But it's just going to take a while for everybody

to adjust to that and all of the vessels in our 200 vessel fleet to kind of get remarked up. So it's just going to, it takes some time, right, in order to do that. And so I bring that out just because, you know, it does vary by geography. For example, in the U.S. Gulf of Mexico, where the larger boat companies are, you know, it's probably four or five of the large boat companies, they can push boat rates a little bit higher here in the U.S. Gulf of Mexico than you can in areas like Asia, where it is much more fragmented. But even in areas like Africa, which is, I would say, I know, mid-level fragmentation, still, they're all still relatively high, but just mid-level high in Africa, we're starting to see day rate acceleration that is exceeding our

expectation. So very excited about, you know, the pace of increases. It's just going to take a couple of years in order to get everything normalized. Unfortunately, it just takes that time. Perfect. And then I just want to ask, look, investors are familiar with offshore anything capital intensive, anything that touches energy, basically, right? Like the EBITDA number can be great, But a lot of times there's a lot of cap-x behind that number. And obviously, we talked about how we're nowhere close to new build incentives. We'll probably dive into that a little bit more. But people are going to think, oh, these are big boats, dry dock expenses, maintenance

cap-ex, keeping them up. I want to talk about your, if people go look at the deck, 666 million of EBITDA. You say at that level, we'd have a 91% free cash flow conversion. So talking 600 million, what's going into that, you know, what can people think of a maintenance cap-x number? what's going in what's behind generating so much free cash flow on these yeah so i mean quentin i'm happy to yeah go ahead thanks so yeah so you know when we think about we do have dry docs and that that is generally speaking our largest uh you know kind of cash you know non-opex

cash spend and you know i guess for those who aren't as familiar with uh the the you know the vessel industry is you know that that is effectively what you would consider uh maintenance capex right every five years and generally speaking about every two and a half years but really every five years the vessels have to go into a dry dock which is where the vessels lifted up and a series of inspections and repair you know maintenance and so on and so forth goes on and you know that that usually is anywhere from 30 to 45 days out of work and anywhere from depending on the size of the vessel a few hundred thousand dollars to a couple million dollars okay and again that's just, you know, you know, that's like clockwork. You got to do it every five years if you're

going to work that vessel. And so, and that's generally driven, you know, the, the, the, the, the, the timing of the dry dock is generally driven by the age, assuming that vessel's been working the whole time, however it's been laid up. And so on, maybe it gets, you know, kind of out of, you know, out of, out of cadence, so to speak. But generally speaking, uh, it's driven by age. So the reason why I say that is because, you know, it's easy to say, okay, every five, you know, if you just kind of prorate your fleet every five years, that's how much you should expect to expend. Unfortunately, it's a little lumpier than that. You know, not all vessels were ordered, you know, uniformly across years and so on and so forth.

So there is some lumpiness in there. But, you know, for a fleet, our size and kind of the complexion we have, that spend is probably somewhere in the neighborhood of $60-ish million a year, again, with the lumpiness that can come through. So that's kind of our biggest, you know, cash, again, non-op-X kind of cash item is the dry dog. So for, you know, for, you know, conversation purposes, call that kind of $60 million a year. Beyond that, we do have some outstanding debt. We did a bond offering in the Norwegian public debt markets a little over a year ago. And the cash interest on that, it was a $175 million bond issue at 8.5%. So we do have about $15 million a year cash interest expense.

We do have some, you know, what I'd call, you know, non-vessel CAPEX that, you know, it's generally related to, you know, IT and technology projects. And now as we kind of move forward, some projects around batteries and things like this. And that's, you know, call it, you know, five to 10 million a year, you know, just depending on what we have going on. And so those are kind of the main cash items that we have or, you know, cash outflow items that we have. And so, you know, when you when you look at a, that earnings scenario and you don't have big dollars that are being used for new builds, and again, you have kind of a fixed operating cost base and you take out those kind of cash flow items, that's why you have such high

cash conversion. Because we do have the maintenance, uh, capex that, you know, I think any oil field services investor, energy investors, probably used to sing, but not to the, we don't, because we have a 20 year, 25 year asset versus a three to five year asset, if you're talking about a frack fleet or a, you know, something of that nature, you just don't have the velocity of capital spending needs that you do in other, you know, silos of the oil field services space, which is what allows us, frankly, to to generate that kind of free cash. I think, you know, that's kind of the beauty of this business and why ultimately people have gotten it and gotten into it over time is because of that free cash generative capability. And then you mentioned, look, again, at that back end of the lives, obviously people are going to have, if the company is going to have terminal value, eventually you're going to have to replace the boats. But the nice news for investors is the fleet is in really good shape. This is an 11-year-old fleet right now. So you've got, you know, 10 plus years until you have to start worrying about the average boat kind of. retiring and obviously there'll be replacement costs in there, but in the near term and medium

term, the cash flow is going to be incredible. Okay, so I think that's great. Let's talk. We said 666 million EBDA. We've gone through free cash on everything. I want to talk day rates right now, what you guys are seeing in the market. You know, at the Pareto conference, you said the 18.5,000 day rate was the EBITA number. I'm looking at the slide. Slide 17 says leading edge contracts, the average day rate is kind of 17,000 for the biggest votes. It's over 23,000. And the last time you guys gave an update was the Q3 call where I think leading edge rates were for some for some sectors were in excess of $25,000 per day. So people might have heard that 18.5,66 million EBITDA number and said, oh, you know, that's an ideal scenario. And I would kind of say, no, obviously the boat needs to reprice and we can talk.

We haven't talked about how you guys have structured your contracts and everything. But it seems like we're already there. So what are you guys seeing for leading edge rates right now? well you know it does vary by a region all right and it'll certainly vary by a vessel class and again you know there there's publicly there there's publicly published data out there that i'm going to lean on because i don't want to talk a little bit about the i don't want to talk too much but really i don't want to talk about q4 until we do the q4 no yeah absolutely so but you know what you'll see when you you look at data like from west shore or from clarkson's or even from

Pareto. You're starting to see that every quarter of those raids continue to leap much faster than they left in the past. So there's definitely market data out there that suggests that the larger boats and the tighter regions are going out for more than $30,000 a day for a term work. So this has worked, you know, longer than a year. So that's another $5,000 leap on top of what was what we set on our call in Q3. And, you know, barriers by vessel size, too. So you're starting, that's definitely in the large class of vessels, so a thousand square meter deck boat, modern vessel. But even in the older vessels and the smaller vessels, you're starting to see significant increases. So movements are two to three thousand dollars a day ahead of where they were at. So, you know,

the momentum and day rate acceleration is continuing to increase and continuing to maintain itself. So we are very, very encouraged by the day-rate environments around the world in all vessel classes. I don't think it would be quick. Go ahead. Yeah, you know, the other thing I was going to say is a little bit of what we would talk about before, which is, you know, the whole scarcity of vessels is getting into the mindset properly of the EMP companies because they realize now that they just can't call out a vessel. So they're not letting vessels go, which is tightening up the market.

but they're also willing to pay more for vessels in order to ensure that they got them available throughout the year. So, you know, we're getting back into a bull market scenario where, you know, a lot of the ability to negotiate, the power of the negotiation is largely in the vessel owner's position, and we're continuing to push price. We're also pushing term rates. I mean, sorry, the terms of the contracts. You know, there's a lot of non-day rate terms that do have an impact that we're pushing. pushing back on too. So everything right now is very, very bullish for the best longers. Wes, did you want to add anything? No, no, I didn't mention anything. I mean, look, as an investor, I look at that and I say, I won't put it into your mouth, but I look at the leading edge rates and

we'll talk how you guys have set up the structure of your contracts in a second, but I look at them and I say, look, they had a 666 million EBITDA number. I think they could get about 600 million and free cash flow number on that, you know, I look at leading rates and I say by the end of 2003, I wouldn't be surprised if they're beating that number and generating even more free cash flow with this fleet or something. Maybe it would take to get into 2024, but kind of on a run rate. So I look at that and say, my God, the free cash flow generation these guys can do. And we talked about the supply demand and how a supply response is probably two and a half, three years or more out. And you just look at that story. And my gosh. So let's start.

I just want to talk how you guys have structured the rates because if people have looked at any of the offshore drillers, especially. They're going to look and they're going to say, we've already talked about how you guys have almost the whole fleet active. If you looked at offshore drillers, you know, a lot of them have cold stacked or warm stack and it takes months and months to get those. And a lot of them have contract links that can run years. So, you know, they might have struck a four-year contract in 2021.

It's great that rates for a semi is going to $400,000 per day now, but they struck a four-year contract in 2021 at $200,000 per day. So it's going to take five years for them to get that. I want to talk about how you guys have kind of termed out the book to take advantage of these because I do think it's unique in kind of the offshore space to be to front run the answer, to be as open as you guys are. Yeah, no, absolutely. You know, we especially for the larger boats.

So with the larger boats, more modern part of our fleet, we're going as short as possible. And we're just taking advantage of the day rate acceleration, so just repricing every time the vessel turns over. because of the psychology that we were talking about, you just got to turn the boat over a couple times with your customers before you can start really pushing the day rate up and we're starting to see that. Now, you know, with a fleet of 200 boats,

there are boats that, you know, they're not, you know, not every boat in a 200 boat fleet is the best boat in the world, right? You know, we've got, you know, we definitely have high rate of the fleet by getting rid of a lot of a lower spec vessels, but we still have some lower spec vessels in our fleet. And we will more likely lean to locking up those types of votes just because they're a little bit more marginal. And, you know, I'll take a good day rate and run with it for a good distance. But, you know, it will take us a few years to reprice the entire fleet just because of that pace, right?

But listen, I have not seen a pace in the history of this industry that has been as quick to reprise as this one is. but we also have never started from a deficit as low as we were. So it's just going to take a number of years to get back to even earning our cost of capital as well. And then, of course, you know, I think they'll take even longer time for people to commit to ordering new bills just because, you know, it's not just the day rates. So there's other technological factors and concerns about the, you know, just the long-term demand for vessels that people are factoring in when they make an investment in a 25-year asset. I think supply will remain more in check this time. And I just have one thing in terms of the pace of, you know, kind of the fleets, you know, the all-in fleets, day rate is we do have still some legacy contracts that were in place that we put in place, you know, call it 2019, 2020 during the pandemic where it was, you know, more about keeping the lights on.

So, you know, there are some of those legacy contracts, to your point, you know, on the offshore rig. If you've locked up for four years, it doesn't really matter what the prevailing day rate is. you're getting what you get. And we do have a few vessels like that that are still, you know, getting what I certainly below market rates that were contractually, you know, obligated to perform under. Now, the good news is, is that a lot of those contracts kind of got worked through last year. And we expect that by, you know, late part of this year, the, all those call it legacy contracts have kind of worked off. So we'll have a lot more ability across the entirety of the fleet to kind of to mark those vessels to market and kind of have the fully bloated, you know, market rates

with it across the whole fleet. Perfect. I realize we're coming to the end of kind of our calendar time. So if you guys have a stop, you just let me know and we'll stop it right there. But I'm going to keep asking questions until you guys tell me you've got to stop. And there's obviously just tell me your public company CEOs and CFOs. I'm sure you've got tons to do. I do want to ask though, probably everyone's hearing this. I think people are hearing how bullish I am, you guys are. I think there's a lot of free cash flow to come in. But anybody who's been around the sector probably thinks, oh, there's always something that kind of breaks. They've got the what breaks the cycle question their head. And I do look and, you know, I tried to be rational. And I went

back and pulled, I don't think you guys were involved then, but I went back and pulled Tidewater presentations from 2012, 2013, the last bull cycle. And you can find a lot of the language that is similar to this. You know, I'm looking at one of them right now. And they say, hey, yes, there's under construction, but it's not enough to cover retirements, right? There's going to be this big retirement cycle and they say, hey, offshore drilling is going to come in hot. You know, it's a lot of similar language that the cycle's big. It's going to sustain high day rates. And obviously, that cycle broke miserably. And we're eight years later and we're just starting to talk about the cycle turning with thanks to maybe in part, you know, COVID shutting off supply, all of these

other changes. So the first question that people are going to have is, hey, why is this time actually different? I've heard this story before. Yeah. And so, you know, I don't want to overuse the expression this time. This time is different because this still is a cyclical business. And I don't want to leave the impression that it is not cyclical. And every cycle breaks. So it's not different that a cycle breaks. We just got to look for those points that indicate that, you know, we're getting to the top of the cycle or it's rolling over. Now, very, very often, you know, it's either, an overbuild or some macro event that impacts the cycle. So, you know, we're certainly not in an overbuilt.

We are not building. In fact, we're still attritioning on a net basis year over here. So the industry, you know, from where it was in 2013 and 2014, has shrunk almost 30% from where it was at that time. So it's a smaller industry. And we have fewer vessels. And we at Tidewater have a disproportionately better fleet. So, you know, we shrunk our fleet, but also at the same time trying to increase the overall earnings capability of the vessels that we have on an average basis.

And so that's what that's been our dynamic as we've both passed, you know, seven to eight years. Now, as we continue to think about what happens, you know, in our industry, certainly if we start to see a significant amount of building that occurs around the world, we should be concerned. All right. Because even in 2013, 2014, there were 400 vessels on order. So, you know, you're looking back and saying, okay, well, you know, can the industry really absorb, you know, 400 vessels? Is the industry really going to have attrition, older vessels at that rate? No. You know, unfortunately, with a fragmented industry, people don't let go of vessels as quickly as economics would suggest that they would. And as a result, you know, the groups are somewhat somewhat differentiated in the sense that, you know, you've got companies like Tidewater that have the disproportionately stronger and more productive assets, and then you have other called value or economic players that are just running smaller vessels. And so each one of us has an incentive to keep our boats in play. And as a result, you don't see the attrition as fast, right? And as I indicated before, we were, you know, looking back on that part of the cycle in 2013,

2014, you know, we were oversupplied going into the downturn, right? Now, what caused that downturn was the crash in oil prices. So to the extent that we see, you know, there's two things that I worry about. One is an event similar to what we saw with Deepwater Horizon. Yeah. Okay. When everything goes back to work suddenly, you've got a bunch of new employees. You've got a bunch of equipment that hasn't worked in a long period of time. You run the risk of something terrible happening. And of course, here at Time Water, we're very focused on that potentiality and very communicative with our groups and making sure that we've gotten all the training and making sure that we're on top of it. But we worry about something like that because that

will shut down a geography. You know, it just doesn't shut down the world, but it'll shut down a particular geography or for a long period of time. And if it's in the North Sea or if it's in the U.S., then it's going to have a more pronounced effect because those industries are already under pressure. And if there was something negative to happen, then you may see that. It'd be more substantial than it's been in the past. I think the industry is very smart. This is on balance, a very safe industry. People are very dedicated to safety. And so I bring it up because I think it's important to bring up. But my hope is that we don't have an instant like that, of course. And the other element is just, you know, as quickly as this industry change, you know, this outlook that we talked about,

people focusing on energy security that they came to in the spring of last year, maybe that changes. Now, I will say that even leading up to the conflict in Ukraine and that the pendulum shift to energy security, we were still increasing our boat utilization and boat and day rates. But, you know, a shift that put the world back onto a track of globalization and harmony would certainly have, I think, a dampening effect on some of the activity that we're seen out there today. If I could just follow up with a couple things to what you said. just a few minutes ago you mentioned in 2013 there were 400 boats on order just to put that in

perspective tide water is the largest player in the industry and you guys have under 200 boats so we're talking about two tide waters in order the global PSV fleet is 1400ish boats so i mean that 400 boat just to put that in number that in perspective that's a mass number and then on globalization i do hear you that that leads into my next question right like people are familiar energy prices have been volatile we saw a big spike in oil prices over the summer post-Ukraine energy prices have been pretty soft recently you know these are an offshore oil commitment is a billion dollar commitment people don't care if the spot price is 80 versus 90 they're really looking hey what is oil for the next 10 years when we're making this investment but you know

oil prices have the spot the out your oil prices have come down over the past six months so the last thing that could kind of kill the thesis we've covered the supply side I think it's the demand side so I do think people think, hey, where does out your oil have to go where an oil major starts looking and say, hey, that billion dollar oil investment we were going to make, maybe we don't make it because the oil prices might be below where our kind of risk-adjusted return of capitalists. How do you guys think about that or what are you hearing from your customers on the kind of oil side? So we have not seen any pullback whatsoever.

In fact, we still see people picking up the drill bit and leaning into the site. So from the standpoint of what we're seeing on the ground and what we're seeing for 23, I don't see any pullback. But that dynamic that what you're talking about is something that we're always looking for, right? You know, so, you know, in Tidewater, what we're trying to do is be disproportionately higher quality fleet. So no matter what happens, if all the drilling goes away, there's still going to be a significant amount of offshore fossil activity work that has to happen. And I want to make sure it goes to Tidewater vessels. Those milk runs you talked about earlier, yep. Exactly.

Now, again, if that were to happen, you know, again, it is drilling that pushes us to those highest day rates and the highest utilization periods, right? And so if that were to go away, we would have to normalize the fleet again. You know, we'd have to shrink a little bit by cutting out the lower spec vessels in our fleet. But that's just what we do in our industry in order to match our fleet with the demands of the market. Perfect, perfect. Let's talk capital allocation real quick. My hope, I think your expectation is that there is going to be a lot of free cash flow pouring in this business. We talked a little bit earlier about you guys at the SPO acquisition earlier this year, which I think was

great timing. I think it's been a home run so far. But capital allocation, you're going to have a lot of cash flow coming in. This is a business that historically has supported some leverage. You have a little debt outstanding, but net debt is basically going to be zero at the end of the year, I would think, close to zero. So capital allocation, you could do M&A, you could leverage the business up, you could do buybash, you could do dividends, you could do a combination of all of them. How are you guys thinking about capital allocation going forward? Well, so, you know, as it relates to new bills, let's take that off the table, right? You know, there's no sense in adding more capacity to this market at the prices that would take to build a new vessel. West is going to correct me here,

but a new vessel, West, 65, 70 million? 60, 65. There's a slide in the Pareto Debt, slide 21, if people want to see kind of the economics, what you guys assume behind it. And again, it comes out to you need a 38,000 day rate, which even with this spike, we're not even close to. For 20 years, right? For 20 years.

Yeah. So let's just say new bills off the table. There's no capital going to new bills, unless somebody comes to me with a contract, if they're just going to pay me the equivalent of $38,000 to $20,000. So then you look at, okay. you know, certainly value accretive acquisitions that we could do. That makes sense to do.

I'm very interested in doing it. You know, if I could do another deal like a Swire, I would do it. I don't think there's another deal like that quite on the table, but there's going to be other deals that are out there. So, you know, if I could put more money to work and the returns that I think that we're going to get on an SBO acquisition, I would do that. And I think our shareholders would be very happy for us. to do that. But I don't think there's enough of those deals to outstrip the amount of cash

that we're going to generate. So we're going to have to give some money back to shareholders in one form or another. Now, the good thing is the negative carry isn't as bad as it was three years ago, right? You know what I mean? Interest rates are going up a little bit, but that still doesn't convince me to hold on to the money. So, you know, I do need to make sure that there's enough liquidity in the business to withstand the vagaries of the cycles that we've all been talking about because it is a cyclical business and it's never lost on me that the cycle's going to turn. So I need to make sure that I've got a debt capital structure that can withstand, you know, a reasonable cycle. And right now, the capital markets aren't there for our

company. So we've been leading on a cash balance just because we don't really have any other way to provide liquidity to the company. But even with, you know, an adequate cash balance and, you know, spending money on acquisitions, we're going to have to return money to shareholders in the form of dividends or share repurchases in the longer term. I don't, you know, the board is going to be the ultimate determining of, you know, what that form is. But, you know, it's definitely going to be something that we consider as we go through the next few years.

Now, West, there's a restriction in the current debt that we should mention here. Yeah, so when we did the public debt issuance in their Norwegian public debt markets last year, there is a provision that prohibits us from doing any buybacks or distribution shareholders dividends for the first two years. Okay, so we issued that November of 21. So in November of this year, that prohibition falls away. And then at that point, we're limited to 50% of net income is what we can. basically distribute out to shareholders, you know, and that's something we think about and, you know, whether or not there, you know, some sort of, you know, situation where we're seeing

a lot of cash and need to remedy that is relevant. But as it currently stands, that's what kind of the limitations that we're exposed to. Yeah. So, Andrew, I guess how I would summarize it is, I'm not looking to add capacity to the market, full stop. I am looking to consolidate, existing capacity on the market and leverage economies of scale to the extent that I think that it's value created to our shareholders. And even doing that, I don't think that we're going to outstrip the amount of cash that we generate and then we're going to find ways to constructively return it to shareholders. And I'll just, Bob Robotti is a major shareholder and is on the board. He's kind of the one who turned me on to this and got me started to talk to

you. I trust Bob has at least one voice to be in the boardroom making rational capital allocation decisions and everything there. So that's great. Let's see. What else did I want? Look, I think we've covered most of what I wanted to cover, actually. I think listeners can hear, I'm pretty bullish. I think you guys are pretty bullish.

The cycle, it just seems great. The cash flow is going to come pouring in. It's a really interesting story provided. We're not looking at $20 oil prices for the foreseeable future again at any point. But, yeah, look, I really appreciate you guys taking time being so generous to your time. Any last thoughts you guys want to get out that investors, should be thinking about or as they get to know the story or think through this business? No. I mean, I think we touched on everything that I would touch on in discussion with the new

investor. Perfect. I agree. I agree. Well, guys, I really appreciate you being so generous with your time. I really appreciate you being good stewards of my capital because, again, I'll disclose. I've got a position in Tidewater. I think this is a great story. I'm looking forward to Q4 earnings and I'm looking forward to catching up with you guys soon. Take care. Thanks, sir. Thank you. Have a good one, guys.

A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.