Tidewater Inc. (TDW) Earnings Call Transcript & Summary

This episode is sponsored by Tegus. Understanding expert insights is table stakes for investors today, and there's no better option than Tegus. I've been using them for years to get up to speed on companies, and they've helped me immensely as an investor. Tegus also recently acquired both BamSEC and Canalyst, adding a super fast way to access SEC filings and earnings calls via BamSEC and offering access to more than 4,000 fully drivable financial models with Canalyst. Tegus is well underway to building a full suite of research products that can displace the legacy terminal providers like CapIQ and FactSet. And I'd encourage you to check them out if you hadn't recently. They are moving incredibly quickly with many new features and data sets. As a bonus though, blog readers will know that I run a monthly -- well, actually bimonthly deep-dive series sponsored by Tegus. In them, I go deep into industries and companies with fascinating questions using Tegus 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 the company and industry. Hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. And if you like this podcast, it'd mean a lot if you could follow, rate, subscribe, review wherever you're listening to it. With me today, I'm happy to have the management team from Tidewater, the CEO, Quintin Kneen; and the CFO, West Gotcher. Guys, how is it going?

Hey, it's going great. Quite frankly, I'm feeling better now than I probably felt in 5 to 7 years, so.

Well, I know that's interesting.

Going well. Happy new year.

West, how is it going?

Good. I could say happy new year, happy to be on.

Hey, really happy to have you guys on. First podcast in the new year, so happy new year to you guys and all the guests. Let me just start this podcast with a quick disclaimer. Just to remind guests, nothing on this podcast is 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 adviser. 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 space and thesis in the value investing and devalue investing in circles over the past year. I've been spending a lot of time on it. And I wanted to have you guys on because a lot of value investors looking, 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 words. 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.

Yes, absolutely. And we're very mindful of Sir John Templeton words there because we are in a cyclical business. And it's always a 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 because -- even back to 2014, and talk a little bit about what the industry has been through so that can help set up what the industry is going to be going through over the next several years. So 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 both 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's 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 that started in about 2011. So it's just a lot of boats on order and have been slowly building even throughout the '90s. There hasn't been a serious correction in our industry. And as we got to the end of 2014, 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 an oversupply mode, and we had 20% of the fleet on order. So we just had this massive crash that happened in the beginning in 2015. It took a while to get -- to really hit the industry participants because of the dynamic that was in place at the time, you can still walk up boats in 2013 for 5 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 prior to work for $22,000 a day for 5 years. That was a good deal at that time. And so the industry slowly began to crash because it had a little bit of backlogged cover. And you saw a crash in the 2016, 2017 time frame. Most of the businesses went through Chapter 11 restructuring or some form of restructuring in 2017 and 2018. And then we slowly just started to wean through all of these long-lived assets. They are long-lived assets and they just take a long time to correct. Meanwhile, the rig industry, which is 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 proportion. So we were just always under the curve from an oversupply standpoint, if you will. And as a result, it's just taken 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 boat order since 2015. I mean if something got delivered in 2015 and '16 that was kind of emotional most of the way through their construction process when the crash occurred in 2014. But as a result, it has anything on order. And we've been very good about attrition in vessels and put into the scrapyard. A lot of participants in our industry haven't. The holding cost for a boat isn't that significant, but these boats have been deteriorating for 5 or 6 years. And these boats are designed to be constantly maintained. So when you don't have them on the water and being constantly watched out by mariners and everybody turning valves, increasing valves and all the good old stuff that is necessary to keep a boat in good repair, they begin to really accelerate their depreciation. So we've seen that begin to really take hold. And as a result, the supply has finally gotten down to a point where, all right, we're seeing traction in all of the regions and in all the vessel categories. Now when you get down to Sir John Templeton's warning about it's different this time, it's not different in the sense that you can change the forces of supply and demand in this industry. There's 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 is not enough of the supply chain. Some of it is the pandemic supply chain problems, but a lot of it is just the fact that shipyards have gone away. Most of the people that are attending to all 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 if I wanted to order a boat today, one is, there's not that many yards. I mean, 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, 2.5 to 3 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 shipbuilders minds as to what is the right vessel to build? These are long-life assets or 25-year assets. And so if I'm going to build something with propulsion technology today that involves a heavy hydrocarbon output, 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 build mode at this point. So we're watching other shipping industries to see how they handle it. Our boats are different in the sense that they're not -- they don't go for long straight voyages, if you will. They're not going from point to point from China to the United States or other places in Europe. And as a result, they're quick on, pick 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 buildup in activity in the offshore. So I'll stop there for a second, Andrew and just see if you want...

I guess -- go ahead, West.

I was just going to say, I guess I quickly added 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 -- so the underlying economics of what a new build would require today, we're not even back as strong as the markets 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 build-outs, 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 when you add up a variety of 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 kind of prohibitive to new vessels entering the market in any foreseeable time frame.

No, that's perfect. So I guess that -- there's a lot -- 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 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 something. But if it takes 2.5 years for the new builds, if it takes 3 years, like rates can go quite high in the meantime. Now if we're in 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. It 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. Oil prices remained around 75, 80, 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. 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 moving to the microfactors. So the largest part of what we do is it's 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, they need visiting on a regular basis. And the ships will go out there, they'll do maintenance, they'll repair items. If there are demands, they'll bring supplies and so forth. And as a result, a big part of what we're doing is just a milk run. We're just going around the offshore oilfield, dropping off supplies and helping people administer maintenance on the existing assets that are out there. Maybe you call that your install base, if you will. And then that's probably 60% to 70% of what we do, depending on where we are in 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, the number of drilling rigs working and number of boats 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, both up and down. So I just frame the demand equation on that one. So as we were going through, I'll call it, 2,000 and -- so things were taken a long time to correct, right? And so I'll take you back into 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 both 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, bigger is better, they have 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 newer boats. Newer boats cost more. But in the downturn, when everything went to cash flow breakeven as the equation works out, it didn't matter if it was a bigger boat or a smaller boat. They're all going up, it's essentially the same price. So well, 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 rates you want it, but you didn't have to worry about utilization. It was the 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 is working, is being constantly maintained and therefore, the likelihood that it's going to live its full 25 or 30 years is more likely. So all those good things for the larger boats. And so as we kind of 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 next class of boats called it the 800-square meter deck boats. So the large boats, call it, 1,000-square meter deck was going down to 800-square meter deck. Started to see those prices increase. Now as we get into the first quarter of '20, the pandemic hit and it just felt like all bets were off. And then it was just literally any port in the storm, right? You just had to get your boats off higher, really had to get up more higher. You had to get them to a port, you had to get the people that are on the boats off hires, setting your salary cost down. And so the '20 and '21 largely was just about kind of restructuring, getting the boats off-hire, getting them into a port, 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 of '22, people started coming back to the life. The oil price was rising and people were -- who had deferred maintenance. So okay, the other thing that happens is any time if there's a downturn, people start deferring maintenance. So 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, or maybe we're not going to spend as much money on equipment and repairs. And so you have to go visit it, but don't bring over any supplies. Don't spend any time over there. What we got into doing which is kind of visiting and inspecting assets channel. As things begin 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, oh, c***, these prices, let's get everything working. So you start to go out and visiting these production-oriented facilities and begin to optimize them. So if a generator had gone offline or something else that 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 '19, but also kind of in the end of '21 into '22 was just this increased level of maintenance activity and kind of catching up on deferred repairs and maintenance, right? And so all of that began to increase at the end of '21 and into '22. And oh, man, now it's not just the big boats that were in short supply. It was the 800-square meter deck. And you're starting to see rates in all the regions starting to increase. We're like, okay, 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 of '22, where people got focused on energy security again. And so they're like, okay, where are we going to go? And 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, and others, they're usually the most reactive. And so the most reactive areas are in the North Sea and the U.S. Gulf of Mexico. And we didn't see that this time. What we saw were the majors holding back. And I attribute to that to a little bit more capital discipline on their side, perhaps a little bit more focused on renewables. And as a result, we saw the NOCs dive in. So we saw Saudi Aramco, we saw Petrobras, they had early in '20 and into '21 continued to 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 '22 and the energy securities theme, really took hold, everybody started jumping in. So all the geographies started to put boats back to work and put rigs to work as well. As a result, activity levels have been increasing nicely ever since. So we're in a nice position as we come into the end of '22 and begin into '23, that really, we haven't seen in over 7 years where people are -- used to be -- all right, just to give you an example, it used to be, we'd have boats of the dock just waiting to get on to work. Nobody would want a boat long term because why lock up a boat long term when you could just call out a boat as necessary. Now people are trying to put boats to work 5 and 7, 10 years even. As a result, we -- the E&P 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 that has the effect of people holding on to boats longer, which further tightened up the market, right? So we're in this nice phase as we go into '23. All -- virtually, all of our boats are working, West, you have to correct me, but there may be...

Yes. We have a few still held for sale, but essentially.

Yes, yes. So bringing us all the boats are working. The day rate acceleration has just 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 relatively speaking, we're in a good position.

Perfect. West, did you want to add anything on the demand picture, West? Or I know we'll be talking about the EBITDA number in a second, which I'm sure you'll be jumping in.

Yes, no problem. I mean one thing that we look at and I think plenty of market observers should watch this part, podcast look out is what the expectations for offshore spending is going to be in. We follow that through a variety of resources. And as Quintin 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 offshore capital commitments -- announced capital commitments are over the next few years, 2022 was a nice year. But 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 talked about the 2 curves meeting earlier and you have that demand curve really move out, then there's only one way to kind of satisfy that imbalance in that sort of price. And so 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 kind of industry research folks out there, they actually don't even include 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 it's a substantial move up over the next few years. I think that's driven by just the latent 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 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 pretty exciting.

Perfect. Perfect. Okay. So I think we've covered the supply and demand story. And hopefully, people see 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. When utilization for industry goes from 50 to 60, you're not really going to see rates tick up, 60, 70. But as things get tighter and tighter, the rates are 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. If oils are at 70, if you're going on a boat -- if you're going to know us from 15,000 per day to 20,000 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 the valuation earnings power will be great. So as we're talking, we're talking January 4, 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 billion, $1.85 billion market cap, whatever people want to do. Q3 earnings are $50 million. out of which we've talked about rates have been going up a lot. Utilization has 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 see a higher valuation. But if I just annualize Q3, you'd be trading about 8.5x EBITDA, $50 million -- about $50 million EBITDA, so it's $200 million annualized. So 8.5x, that's not that expensive. These are actually free cash flow 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 published was September. I'm looking at that at Slide 12. You guys start talking about, hey, if we can get to an $18,500 per day, day rate, that would get us to $666 million in annual EBITDA. So again, EBITDA translates really nicely into free cash flow. We're talking about 3x EBITDA, maybe 3.5x free cash flow at these levels, if you can hit that rate. So I want to pause there. West, I'll probably toss to you. Quintin, you can jump in. But walk me through that valuation number. Why the $666 million number can get in there, the assumptions behind that 18,500 day rate and that EBITDA number?

Yes, sure. So that -- and we can talk about this separately, but that was an exercise we went through after we acquired Swire 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 in a part of the world -- or in 2 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 and 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 and looking backwards is a terribly instructive as to what the earnings power in our case, of a given fleet can do or 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 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 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 cost of labor and things like this are really fixed for us. And that, if we were -- if we're -- if a vessel is 50% utilized or 100% utilized, we're paying our crews the same. Now you can have some incidental repair and 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 amplitude of rate expansion. So we kind of staggered it that way to say, if at a given utilization level on a given day rate, what do 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, at 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, look, we'll show it there kind of putting in perspective of what Tidewater at that time generated. And so that kind of puts out this $670 million -- it was kind of by having, it was 666. I don't know if there's anything.

I saw it, I was like, I don't know if I want to put that number into that, especially something that's been as curse as offshore for this long.

Right. Maybe I 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 almost a decade ago now, there's been a variety of things that have happened to the fleet. One is, as we've sold a lot of older, smaller vessels that at that time or just even now, just generate 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 fleet or kind of optimize the fleet for the larger, newer vessels that Quintin 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 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 the average day rate in a similar market environment would be meaningfully higher than $18,500. Again, for purposes of that presentation and for that analysis, we wanted to just kind of put it in something that people could sink their teeth into and say, okay, they did this back in 2014, let's put it there. But the fleet is not the same now as it was then. And so we are much more positive on kind of the aggregate day rate power, if you will, the fleet now than we would have been in -- as compared to where we were in 2014.

And I want to go into a couple of different components of -- and again, people can go look this is the September -- what is it, the Pareto deck that you guys did. It's on the Tidewater website.

Yes, it's on there, yes.

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 2 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 do you just want to talk to the utilization you assume and why that's a reasonable assumption in there?

Yes. And I'll let Quintin 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.

Yes, yes.

And we still have a lot of vessels that we were selling. So we had kind of total utilization, active utilization. And active utilization is 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 at 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 in our public filings. And so it was to say, look, we think what is probably a realistic 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 growth scenario, it's not just going to be day rate because, as 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 200 vessels or so that we have when you think about dry docks and just frictional employment between contracts, downtime for repair and maintenance, the practical utilization that we could probably achieve for our fleets around 92%, maybe 93%, okay? So not quite fully utilized a full effective utilization, but it didn't closed, 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, I think, support these rate increases that are contemplated on that page.

And obviously, you guys are getting close to. I'm just looking at Q3, total utilization, 78%; active utilization, 84%, and that's going up from everything I've seen in the industry. So obviously, you're already starting to get to that utilization.

Yes. And as I alluded to, and I think we talked about in the last call is the difference there between that total and active is we did have -- yes, we did have a handful of vessels that were still assets held for sale or otherwise laid up. So that's the delta there is kind of these nonactive vessels. Shortly, we should expect -- as we talked on last call, we should expect that total and active utilization to converge as we basically just have our kind of go-forward fleet that we're happy with and that we're going to work moving forward.

Perfect. Quintin, did you want to add anything there? I just want to talk free cash flow -- go ahead.

Yes. Yes, let me add a few things about just the psychology of the market to give you a little bit of a background on how the industry operates and then we can go into free cash flow and all those other good things. But I get a question sometimes, it's along the lines of, well, so supply and demand is so tight, why don't you just push all the day rates up to $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 7 years, 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. You mentioned the Pareto conference, the groups at Pareto and Clarksons and a group called Westshore as well, They all have available online spot and term day rates for our types of vessels, right? And if you look at the current term rates for vessels that are going to work 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 if you're 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 it does vary by geography. For example, in U.S. Gulf of Mexico, where the larger boat companies are, there's probably 4 or 5 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, a mid-level of 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 expectations. So very excited about the pace of increase. It's just going to take a couple of years in order to get everything normalized. And unfortunately, it just takes that time.

Perfect, 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 CapEx 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, drydock expenses, maintenance CapEx, keeping them all 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? What do you think people think of a maintenance CapEx number? What's going in -- what's behind generating so much free cash flow on these?

Yes. So I mean, Quintin, I'm happy to...

Yes, go ahead. Thanks.

Yes. So when we think about, we do have drydocks and that is, generally speaking, our largest kind of cash -- non-OpEx cash spend. And I guess, for those who aren't as familiar with the vessel industry is, that is effectively what you would consider maintenance CapEx, right, every 5 years and generally speaking about every 2.5 years. But really every 5 years, the vessels have to go into a dry dock, which is where the vessel is lifted up and a series of inspections and maintenance and so on and so forth goes on. And 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 of million dollars, okay? And again, that's just that's like clockwork. You got to do it every 5 years if you're going to work that vessel. And so -- and that's generally -- the timing of the dry dock is generally driven by the age assuming that vessel has been working the whole time. However, it's been laid up until maybe it gets kind of out of cadence, so to speak. But generally speaking, it's driven by age. So the reason why I say that is because it's easy to say, okay, every -- if you just kind of prorate your fleet every 5 years, that's how much you should expect to expand. Unfortunately, it's a little lumpier than that. Not all vessels were ordered uniformly across the years and so on and so forth. So there is some lumpiness in there. But 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 cash, again, non-OpEx kind of cash item is the dry dock. So for conversation purposes, let's 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 market. It's a little over a year ago. And the cash interest on that, it was $175 million bond issue at 8.5%. So we do have about $15 million a year of cash interest expense. We do have some what I'd call non-vessel CapEx that is generally related to IT and technology projects. And now as we kind of move forward some projects around batteries and things like this. And that's, call it, $5 million to $10 million a year, just depending on what we have going on. And so those are kind of the main cash items that we have or cash outflow items that we have. And so when you look at 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 CapEx that I think any oilfield services, investor, energy investors probably used to seeing, but not to -- we don't -- because we have a 20-year, 25-year asset versus a 3- to 5-year asset, if you're talking about a frac fleet or something of that nature, you just don't have the velocity of capital spending needs that you do in other silos of the oilfield services space, which is what allows us, frankly, to generate that kind of free cash. I think that's kind of the beauty of this business and why ultimately people have gotten into it over time is because of that free cash generative capability.

And then you mentioned, look, again, at the 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 10-plus years so 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 EBITDA, we've gone through free cash flow and everything. I want to talk day rates right now. What you guys are seeing in the market? At the Pareto conference, you said the $18,500 day rate was the EBITDA 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 boats, 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 sectors, we're in excess of $25,000 per day. So people might have heard that $18,500, $666 million EBITDA number and said, oh, 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?