Tidewater - Q2 2024
August 7, 2024
Transcript
Operator (participant)
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 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Wes Gotcher, Senior Vice President of Strategy, Corporate Development, and Investor Relations. You may begin.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
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 Kneen, our Chief Financial Officer, Sam Rubio, and our Chief Commercial Officer, Piers Middleton. During today's call, we'll make certain statements that are forward-looking, 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 7, 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.
Quintin V. Kneen (President and CEO)
Thank you, Wes. Good morning, everyone, and welcome to the second quarter of 2024 Tidewater Earnings Conference Call. Second quarter revenue nicely exceeded our expectations, driven by stronger than anticipated dayrates, with printed dayrates exceeding our forecast by nearly $800 per day. The second quarter marked the highest ever printed dayrate for Tidewater and the highest gross margin percentage in 15 years. This is a notable milestone that highlights our efforts to high-grade 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 dayrates, 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. Dayrate improvements were broad-based, with each of our vessel classes in each of our geographic segments posting sequential dayrate improvements. The continued dayrate 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 dayrate performance we continue to realize. New build 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 reforecast 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 and the supply and demand balance by both 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. Piers 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. Sam will give you insights on how we see our operating costs going down over the next two quarters. In addition to the above, Wes is going to speak to you about our capital return philosophy and our thoughts on improving our debt capital structure. Piers is going to speak to you about the overall strength in the market.
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. 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 those shares into the open market. So over the past 3 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, subsea 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 and a rising demand environment to continue to push day rates and drive earnings and free cash flow growth, and we are well positioned to do so. With that, let me turn the call over to Wes Gotcher and Sam Rubio for additional commentary and our financial outlook.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
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 have 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 leverage 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, as 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 enter into new contracts, bringing down the quarterly composite average day rate.
It's worth noting that our large and medium classes of PSVs and large and medium classes of anchor handlers all had high single-digit to low double-digit rate improvement sequentially. The average duration of new contracts entered into during the second quarter was just under 5 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-$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 dock days in the third quarter compared to our previous expectations.
We do expect a nice counterseasonal step up into the fourth quarter, in line with our prior expectations, as delayed projects commence and as our dry dock days decline materially. Given the our 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%, an 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 Piers for an overview of the commercial landscape.
Piers Middleton (Chief Commercial Officer)
Thank you, Wes, and good morning, everyone. On this call, my objective is to give more nuance around our chartering strategy and why we are 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 commencement.
In Q2, our average charter length for new contracts remained 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 by 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 Q3/4, with the expectation of them going through later into 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-term 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 5 of our vessels operating in country, and last week, we were informed that all 5 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, and any idle time will be offset 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 is more value in waiting for the work to commence than to reposition both respectively.
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. 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 charter, chartering 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.
Sam Rubio (CFO)
Thank you, Piers, and good morning, everyone. At this time, I would like to take you through our financial results, and then 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 two percentage points 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 Piers 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 Piers 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 costs 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 in 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 30, 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 30, 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 compensation. 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 regions' results. To summarize the results, our regions' dayrates improved by 8% in the quarter, led by the Americas and Asia Pacific regions, which were both over 9%. Revenues 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 in dayrates 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 Quintin.
Quintin V. Kneen (President and CEO)
Thank you, Sam. Mandeep, if you would please open it up for questions.
Operator (participant)
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 one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star one again. If you're called upon to ask your question and 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 one to join the queue. Our first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.
Jim Rollyson (Director and Equity Research Analyst)
Hey, good morning, everyone.
Quintin V. Kneen (President and CEO)
Good morning.
Jim Rollyson (Director and Equity Research Analyst)
Quentin, you know, obviously a little disappointing when things get pushed to the right versus, 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 2025 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.
Quintin V. Kneen (President and CEO)
Yeah, that's absolutely correct. And 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 gonna slow down. I don't even see when it's gonna slow down, in 2025 or 2026, still look just as optimistic as I always have.
Jim Rollyson (Director and Equity Research Analyst)
Got you. And then on the leading-edge rates, you know, 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 3%-4% collectively, and this quarter, that number was probably, you know, double that in the high single- to low double-digit. 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 mix impact going forward.
Quintin V. Kneen (President and CEO)
No, absolutely. I'm gonna give it over to Wes because he studies this more deeply than anybody, and then Piers could probably comment a little bit more on the Middle East contract roll.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
Yeah. Thanks, Quintin, and good morning, Jim. So as it relates to your... the first part of your question on the leading-edge day rates for, you know, the, the, 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 mix element here, and as I mentioned in my prepared remarks, we had some of the smallest vessels in our smallest vessel class happen to recontract 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 worked 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.
Jim Rollyson (Director and Equity Research Analyst)
Got it. I will turn it back and let someone else ask questions. I appreciate the answers.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
Thanks, Jim.
Operator (participant)
Our next question comes from the line of Greg Lewis with BTIG. Please go ahead.
Greg Lewis (Managing Director)
Hey, everybody, thanks, and good morning, and thanks for taking my questions. You know, thank you for the, the guidance, you know, and the commentary to kind of get us there. But, but, I was hoping... You know, I realize what we're- 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, so kind of help us understand that a little bit.
And then, you know, I guess, Quentin, I mean, it's definitely exceptionally bullish times in the PSV market. Any... You know, but of course, any kind of commentary around, you know, what those gross margins look like in, you know, in that 58% range, versus maybe where you've seen them in previous cycles and kind of has... Yeah, just kind of curious on your views around, you know, give us a little bit of a history lesson there.
Quintin V. Kneen (President and CEO)
Thanks. Okay, well, we're gonna answer this in a team format, Greg. And Greg, good to talk to you again. So it is an interesting time because there is, the other element that I would add to the discussion in context of how the gross margin is gonna be accelerating over the second half of 2024, is that this is a very heavy dry dock year. So, you know, we've been spending. I think we spent over $80 million in the first two quarters on dry docks, I think 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 gonna 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 Piers had alluded to and Wes had also talked about. And then in combination with that, you know, we've had, you know, 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 settlement of a customs case in West Africa, and then, you know, another element related to-
Greg Lewis (Managing Director)
The write-off of the amortized costs.
Quintin V. Kneen (President and CEO)
Yeah, right. Oh, yeah. Yeah, I'm gonna talk about that one in a second. So we had a write-off of some accrued mob 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 related to, like, the margins of, you know, where they go and, you know, when they're, you know, where they peak, it you know, listen, 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, you know, over time. So...
And Greg, before I leave it, there's something that I don't know if it came out as well on the prepared remarks, but I just want to talk about it and use your time. You know, 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 of it even roll into the third quarter. And you know, Saudi Aramco decided they were gonna 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 then the mob 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 was 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's, you know, it goes to, you know, just managing a little bit of the geographic diversification to optimize the outcome, and this is just another good example of it. And I think as we roll to Q4, you'll see a little bit more of that as Piers repositions those boats to take advantage of newer contracts.
Greg Lewis (Managing Director)
All right, Noah. Hey, that was super helpful, everybody. Thank you for the time, and have a great rest of the summer.
Quintin V. Kneen (President and CEO)
Thank you.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
Thanks, Greg.
Operator (participant)
Our next question comes from the line of Fredrik Stene with Clarksons Securities. Please go ahead.
Fredrik Stene (VP of Equity Research)
Hey, Quentin 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 volume 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, was this just, you know, arbitrarily a quarter where you only had 21 vessels to recontract, and that's why we got this, you know, higher volume of the lower vessels? So any additional commentary on that would be super helpful.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
Yeah. Hey, Fredrik, it's Wes. Good morning. You know, as I kind of alluded to, it's, it's to some degree, again, the vagaries of having 213, you know, discrete assets that, we contracted for various lengths of time at different points in time. And so, you know, in any given quarter, you can have a mix that, you know, shifts one direction or the other. We did mention, you know, as we talked about in the Middle East, we had, you know, 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, you know, I don't know that there's a rule of thumb.
Could, you know, could there have been a few more boats that a larger boats, to your question, that could have contracted but for the project delays? Yeah, perhaps, but, you know, 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, you know, 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.
Sam Rubio (CFO)
I absolutely agree with that. That's what it was more about, you know, if one thing is that you have a higher number of smaller vessels coming or being recontracted, but also if, you know, you have a negative effect on the other side, if there was, you know, again, by chance, just a quarter where you had fewer available larger vessels to recontract, which would also have, you know, a skewing-
Yeah
... effect on that, that average number.
Absolutely. Absolutely.
Fredrik Stene (VP of Equity Research)
Yeah. Okay, just on... You also mentioned a five-month average contract length. Do you think, you know, on average you'll go much lower than that going forward? I guess for you guys, it's all about managing, you know, having some baseline coverage and also being able to play the market. But if you have to recontract, you know, half of the fleet, each vessel two times each year, it's a lot of recontracting to do. So any thoughts on that?
Quintin V. Kneen (President and CEO)
Well, I think I'm gonna let Piers 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.
Piers Middleton (Chief Commercial Officer)
Yeah. Hi, Fredrik. This was a, you know, a little lower than we would normally expect. I mean, I think previous quarters we've been at nine months or, or so as well. We've been going as a, as a general, composite sort of across the whole fleet. We're still at eighteen months, but, you know, we're starting to see some slightly longer term contracts. I mean, drilling is, is generally short term anyway, and, and, construction as, as well. So I think this was actually to jump on a bit of Wes' 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, recontracting, and some of the contracts were just a little bit shorter than we'd normally see. But I don't think overall our strategy is gonna change. We're still very positive about, you know, the long term for this market. So, you know, that gives us opportunities to continue to drive rates. But yeah, we'll see how we go through the next few quarters, 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 2025 and 2026.
Fredrik Stene (VP of Equity Research)
This is super helpful. The final one for me, which relates to day rates going forward. I think you're right in the report that you know, 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. I think for your, you know, the average rate you reported this quarter, that's around $21,000 per day. Second quarter last year was $16,000. 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, you know, saying that in 2025, the second quarter 2025, should expect average rates to be around $26,000?
Quintin V. Kneen (President and CEO)
All right, Fredrik, you're getting a little ahead there. I mean, I think it's in that, you know, that $3,500-$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 momentum that we're talking about, it is there, and we continue to capitalize on it, and I look forward to delivering on it, so.
Fredrik Stene (VP of Equity Research)
And, thanks. I framed the question like that on purpose, but I guess, you know, I guess around 4K per day is also.
Quintin V. Kneen (President and CEO)
Yeah
Fredrik Stene (VP of Equity Research)
acceptable.
Quintin V. Kneen (President and CEO)
Yep.
Fredrik Stene (VP of Equity Research)
All right. Thank you so much, guys. That's all for me.
Quintin V. Kneen (President and CEO)
Thank you.
Operator (participant)
Our next question comes from the line of David Smith with Pickering Energy Partners. Please go ahead.
David Smith (Director)
Hey, good morning, and thank you for taking my question.
Piers Middleton (Chief Commercial Officer)
Hey, Dave.
Quintin V. Kneen (President and CEO)
Hey, Dave.
David Smith (Director)
Hey, most of my questions have been asked, but I wanted to make sure I understood the comment about higher expected Q3 dry dock days. If that was just shifting Q4 schedule to Q3, if it's a little bit higher expected downtime for vessel, and if this impacts your average utilization expectations for 2024.
Sam Rubio (CFO)
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. You know, the overall Q3 amount of days is, you know, probably around 300 extra days in the quarter than what we originally anticipated.
David Smith (Director)
Okay. But not really a higher expectation of dry dock days for the year, it sounds like.
Sam Rubio (CFO)
There will be higher expectation of dry dock days in the year. Yes. Again, some of it 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. Yeah.
David Smith (Director)
I appreciate it. And then I wanted to make sure I understood correctly that Q3 revenue is expected roughly flat from Q2, because I think that would require a roughly 18% revenue increase in Q4 to hit the new guidance midpoint of $1.4 billion.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
That's right. We expect Q3 revenue to be roughly flat. As we said, you know, in the prepared remarks, a nice step up in Q4. That Q4 expectation, you know, kinda qualitatively around our revenue, is not dissimilar to what we anticipated previously. I think if you think about it conceptually, you know, 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.
David Smith (Director)
All right. I appreciate it. I'll turn it back.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
Thanks, Dave.
Operator (participant)
Our next question comes from the line of Josh Jayne with Daniel Energy Partners. Please go ahead.
Josh Jayne (Managing Director)
Thanks. Good morning.
Quintin V. Kneen (President and CEO)
Good morning.
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
Hi, Josh.
Josh Jayne (Managing Director)
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 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?
Quintin V. Kneen (President and CEO)
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 2025, 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 2024 into 2025 is 2024 is our heaviest dry dock year in a five-year cycle, and 2025 is gonna be our lightest.
So the vessels that have been, you know, you know, off hire in the first half of the year, first nine months of the year, and the money that we've been spending on, you know, repairing the vessels and fixing them up, we won't see nearly that amount as we go into 2025. So there's gonna be more vessel uptime, there's gonna 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.
Josh Jayne (Managing Director)
Understood. And you, you alluded to it earlier, some of the contracting delays that we've seen and, you know, things being pushed to the right in offshore drilling world. Could you just, maybe you could talk about the, the reasons for the delays again. You talked that it was. 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, 12-24 months, and, you know, looking forward would be, would be great. Thank you.
Quintin V. Kneen (President and CEO)
All right. Well, I'm gonna kick that one over to Piers, since he's dealing with them on a regular basis, to talk to you a little bit about anecdotally what he feels is pushing things to the right. And he may have a sense also of the rig market build as we go through the next couple of years. So let me kick it over to him, and then-
Josh Jayne (Managing Director)
Yeah
Quintin V. Kneen (President and CEO)
I'll follow up.
Piers Middleton (Chief Commercial Officer)
Thank you. Yeah, I mean, that's from a project point of view, we saw a number of projects just getting pushed to the right because I think as Quentin alluded to, in his comments earlier, that's logistics and supply chain, project planning, perhaps, from our customers, was not as speedy as perhaps they had envisioned. And I think, one or two customers, I don't really want to be specific on areas, but one or two customers couldn't get a hold of drill pipe, for instance. So they end up, you know, saying, "Oh, we're gonna have to delay the project," or we, you know, things like that, or we couldn't get a hold 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, 60-90 days. So we didn't see any cancellations, so nothing to sort of worry about. But you know, Q4 definitely looks very, very sort of positive on that. I think in terms of just the rig activity, when we look out to sort of, 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. It's not absolute in each of the regions we're operating in.
But I would say our customers, the IOCs now have got themselves better organized, and I think they've got pretty good visibility for 25 and 2026 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 2024 was shuffling around more than anything else, and the planning ended up being a bit more planning than was expected. So, you know, visibility-wise, we're pretty positive as we go into 25 and 2026 with the rig in all the regions we're in.
Josh Jayne (Managing Director)
Great, thanks. I'll turn it back.
Operator (participant)
Our next question comes from the line of Don Crist with Johnson Rice. Please go ahead.
Don Crist (Senior Research Analyst)
Morning, gentlemen. Quentin, I wanted to ask about the M&A market. You know, 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?
Quintin V. Kneen (President and CEO)
You know, there's 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 creates value to our shareholders. And for us, you know, we can make a tremendous amount of money with the 200+ vessels that we have. You know, the day rates that we're talking about, the margin expansion, that there's a tremendous amount of value that's going to be created as we roll through 2025 and 2026, just with the existing fleet. So when I look at potential acquisitions, I'm focused on a particular geography or 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, you know, they have been trying to demand more than I think that they're worth at the current time. And so, you know, we're just staying disciplined, and, you know, I think in the long run, things will get done. But I don't want to. The last thing I want to do is overpay for a bunch of assets, you know? And so, we're just. I would suffice it to say that we're being very price disciplined, but we're continuing to be very active in the market.
Don Crist (Senior Research Analyst)
Okay, I appreciate that color. And just one more for me. You know, it seems like you're gonna generate significant free cash flow over the next, you know, 12-18 months, and just your thoughts around what you would deploy that capital into. Would it be, you know, share repurchases, or would you just kind of build cash or maybe pay down debt, et cetera? Just your thoughts around, you know, uses for that free cash flow.
Quintin V. Kneen (President and CEO)
Well, we're not gonna build cash, full stop. We'll certainly keep cash as necessary for liquidity and so forth. I don't think that we're over-leveraged at this point in the cycle. So, you know, as a result, that cash is either gonna get deployed into value creative acquisitions that we were just talking about, if I can get them done, if we can get them done, or we will return that money to shareholders.
Don Crist (Senior Research Analyst)
I appreciate the color. Thank you. I'll turn it back.
Quintin V. Kneen (President and CEO)
Thanks.
Operator (participant)
Our next question comes from a line of Magnus Øye Andersen with Fearnley Securities. Please go ahead.
Magnus Øye Andersen (Equity Research Analyst)
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?
Wes Gotcher (SVP of Strategy, Corporate Development and Investor Relations)
I'm not sure I understand the first part of the question, but I think what's relevant is, as it relates to those vessels that recontracted in the Middle East. So as we noted in the press release, you know, the rates that we realized by recontracting 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, you know, the lowest- 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 recontracted quickly at meaningfully higher day rates. It just so happened that given the distribution and given the nature of these assets, that they brought down that leading edge day rate, on a composite basis. All right?
But there are elements to that situation that we believe are constructive. Again, a significant improvement in day rates for vessels that were, you know, terminated, right, 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 some, I think, some positive elements there. But again, just given the nature, as we talked about, not, you know, not all rates are uniform, even within vessel classes. That just happened to weigh down the leading edge day rate for the quarter.
Magnus Øye Andersen (Equity Research Analyst)
Okay. Thank you for the color on vessel.
Operator (participant)
That concludes our Q&A session. I will now turn the call back over to Quentin Kneen for closing remarks.
Quintin V. Kneen (President and CEO)
Well, thank you, everyone, and we will update you again in November. Goodbye.
Operator (participant)
This concludes today's call. You may now disconnect.