Tidewater Inc. (TDW) Earnings Call Transcript & Summary

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Solstad Offshore PSV Acquisition Conference Call. [Operator Instructions] Quintin Kneen, President, Chief Executive Officer of Tidewater, you may begin.

Thank you, Chris. Greetings, everyone. Thank you for your time this morning. This will be a quick call. We wanted to be available in case there were any immediate questions on the press release we released early this morning. But if you are here in this call on replay, as always, please feel free to reach out to us if you have any questions. At Tidewater, we're committed to building the highest specification PSV and anchor handler fleet in the world. We're committed to building a sustainable fleet. Last week, we published our third annual sustainability report. And this week, we are announcing the creation of the world's largest hybrid PSV fleet. We're fully committed to safety and vessel reliability. We're especially committed to our shareholders through the allocation of capital through judicious investments in existing vessels that enhance the long-term earnings capability of our business. We're further committed to our shareholders by making the judicious use of leverage at the appropriate time in the OSV business cycle to further maximize shareholder value. I am excited to speak to you today about another amazing fleet, Solstad Offshore's fleet of 37 high-specification PSVs. Many of you know Solstad Offshore. They have been a significant global player in the offshore industry for over 50 years. They have over 80 vessels around the world and have 1 of the most sophisticated and admired fleets on the water. Their mariners are world-class and their operations uptime percentages that are the envy of any shipping company. These 37 vessels will be a great addition to Tidewater. Piers is going to give you more specifics on the fleet, but all of the vessels are active, no reactivations required. It's a young fleet, even younger than ours. The average deck size is over 970 square meters. It's a great PSV fleet. I also like the position it gives us with regards to hybrid vessels. We will be the global leader in hybrid vessels. And on top of that, we're doing at least 1 more hybrid conversion later this year. The purchase price is $577 million, and it will be financed with a $325 million facility led by DNB. I'll let Sam give you the details on that. The rest will be covered by cash on hand, cash generated from operations in the first half of 2023 and another form of new debt. The transaction is structured as an asset purchase. The vessels will be integrated into 4 of the existing 5 Tidewater regions, so the integration burden will be spread out a bit, but the bulk of the addition will be through the North Sea region. Because it's an asset purchase, the realization of synergies will be immediate and will rely on swiftly moving the vessels onto our existing infrastructure. Our infrastructure is quite scalable, but integrations are always tough. We never take them lightly. I hope we have demonstrated to you through the past 2 major acquisitions that the team here at Tidewater is capable of bringing this new fleet into the Tidewater infrastructure efficiently. We see this integration capability as a core competency. It's essential in delivering on our commitment to build the world's safest, largest, highest specification, most sustainable and most profitable fleet in the world. And with that, let me hand the call over to Piers for a more detailed description of the fleet.

Thank you, Quintin, and good morning, everyone. As Quintin mentioned, this needn't be a long call, but we felt it was important to take a little time to highlight why this is such a great fleet of vessels and a fantastic opportunity to acquire a best-in-class fleet of modern vessels, which will solidify not just our position as the largest OSV operator in the world, but also as the leading operator of high-spec PSVs and AHTS tonnage in the world today. We do have an investor slide deck attached to this call, which I won't talk to specifically, but I do want to highlight some salient points, which we capture in the presentation and why they are important. After close, we will have a total of 228 ships in the Tidewater fleet, of which 199 are OSVs and 65% or 130 OSVs, including all of the 37 Solstad PSVs are high-spec larger deck PSVs or over 16,000 BHP AHTS. These high-spec vessels are the classes of boats that are primarily driving charter rates in the global market today. So the addition of 37 large deck high-spec PSVs will further enhance our ability to leverage OSV rates globally. 26 of the Solstad vessels are currently working in the North Sea and will increase our fleet in the region to 46 ships in total and into a market where we saw record forward CapEx approval in Norway last year of $27.2 billion, and where recent leading-edge charter rates for the largest PSVs for 1 year and now at GBP 20,000 per day levels. In addition, we will add 4 PSVs each to our Brazilian and Australian businesses and 3 more large PSVs to our West Africa business, all regions where we continue to see significant rises in leading-edge day rates now in excess of $30,000 per day levels for our largest PSV classes. With this acquisition, we will have further enhanced our world-class fleet with significant future earning potential as we go through this industry up cycle. But also on the flip side of the coin, this is a fleet of larger, higher-spec ships that systematically has always been seen higher utilization and experienced limited decline in down markets compared to smaller, lower specification vessels. We, of course, don't see any decline on the horizon, but think it's noteworthy to mention that this class of higher-spec vessels are the most sought after by our customers even in a downturn. Lastly, Solstad also has 9 battery hybrid PSVs in their fleet and 2 dual-fuel LNG vessels, which added to our own fleet of 5 hybrid PSVs, will create the largest hybrid OSV fleet in the world, and mean that not only can we enhance our service offering to our global customer base, but that we can continue to lead and commit the sailing to Zero sustainability story for the offshore space. Before I hand over to Sam, I wanted to reiterate how exciting this transaction is as we really believe that this combination of our 2 fleets is not only best in class for the market, but the combination of 2 marquee OSV fleets also creates a clear, first choice supplier for our customers around the world. And with that, I'll now hand over to Sam to talk through some of the numbers related to the transaction.

Thank you, Piers. Good morning, everyone. As Quintin mentioned, we will be financing this transaction with a $325 million senior secured bank facility, another form of new debt and cash on hand. The senior secured bank facility has a 3-year term and will be led by our existing lender, DNB Bank. The security includes first priority mortgages, in the Solstad PSV vessels and 2/3 pledge in Swire Pacific Offshore fleet-related companies. Tidewater Inc. will also guarantee the majority of the bank debt. Facility will amortize throughout the 3-year period to $75 million. The blended interest rate for the facility would be approximately 9%. The financial covenants will include a minimal liquidity amount, a minimum equity ratio and an interest coverage ratio and a minimum value clause. Closing of the transaction is subject to customary regulatory approvals and includes a financing contingency. Closing of such financing is subject to agreement on satisfactory documentation and the negotiation and satisfaction of customary traditions precedent. I'm going to switch topics a bit and give you a brief update of our G&A costs for the year. Solstad's G&A allocation for the PSV segment was approximately $15 million in 2022. We do see synergy achievements of approximately $10 million on an annualized basis. In our earnings call last week, we guided to approximately $85 million of G&A costs for the year. With this transaction, we do see G&A expense increasing to approximately $88 million for 2023. Transaction costs related to the acquisitions are excluded from these amounts. With that, I will turn it back over to Quintin.

Thank you, San. Chris, we will open it up for questions.

[Operator Instructions] Our first question is from Derek Fitzgerald with Baird.

Congratulations on the transaction. Could you provide a little color on why someone was willing to -- why they were willing to sell these assets at, what I would say is, a pretty attractive price?

Well, I will let you reach out to the good people over at Solstad to give a full perspective on that. But there are a lot of companies out there today that are still finding their way through a restructuring and to be able to do that, they need to find liquidity to augment those events. And this may have fallen into that category.

Great. Okay. That's kind of what I figured. The new capital structure, I guess, you're leaving the 8.5% notes in?

That's correct.

Okay. So the additional $325 million and then the other financing source that you've alluded to will be first lien on the assets being acquired? And then I think you said 2/3 secured by the Swire Pacific vessels?

That's correct.

Okay. So the 8.5% still have the first lien on the existing Tidewater fleet?

They do.

The next question is from Fredrik Stene with Clarksons.

Congratulations on a great transaction. I wanted to touch a bit on the backlog of these 37 vessels, looking at your slides here, $620 million, 45% firm than what I assume is priced options. For the rest, I think there's also a comment that says that by year-end '24, more than half of the fleet will have rolled off that backlog. So are you able to share any more color on how the rest of that will roll off and just trying to get a sense of when we can see the full cash flow potential from this fleet?

Absolutely. I'm going to give that 1 over to Piers. He's been studying that real closely over the past several months.

Yes, Fredrik. So yes, we have 19 of the ships, as you mentioned, will roll off by the end of '24. So we got the opportunity to look at that and then you stagger in terms of the options going out to the end of the [indiscernible] rolls another 7 or 8 ships going into '25 and then sort of it sort of moves out to another 4 or 5 and then you have 3 ships going out to 2030 on that side, on rolling off on contracts. So you've just got 3 very long-term contracts going out a long time.

And are you able to say anything about the average price or rate on this backlog, just benching it towards what you're reporting for your own fleet?

The average rates at the moment for the fleet is $15,000 obviously above where we are at the moment, but I can't comment on the forward backlog.

[Operator Instructions] The next question is from Ina Golikja with Fearnley Securities.

Congratulations on this highly accretive deal. Like my colleagues have already asked like almost all my questions, and then I had some questions on the vessel margins. In the press release, you had this morning, you kept the 50% vessel margin that you guided last week. So I was wondering, knowing that the Solstad, how they -- like the margin on the PSVs was not at those levels. I was wondering like if you could give me a little more color on the vessel margin on those 37 vessels and how, let's say, your general cost will change or will be impacted half of this year and next year?

Right, Ina and let me give you a little bit more color on that. Certainly, the fleet that we will be acquiring from Solstad is disproportionately higher margin fleet than our current fleet today. And so what we would expect to see over the next -- those margins accreting up into the high 60s. Right now, we're assuming them at [indiscernible] under market rate and as it appears to have illustrated a little bit earlier, it should roll off over the next couple of years into those higher margins that we are expecting for a large PSVs fleet.

All right. And how will that -- like you have given some guidance last week on your yearly CapEx for '23. Has that changed somehow? Or will that -- should we expect that to change?

So let me kick that over to Sam on the anticipated dry docks for the Solstad fleet for the remainder of the year.

Yes, our guidance for the CapEx for the dry dock piece was $77 million for Tidewater, and let me look up what we have for Solstad right quick. Bear with me just 1 second. So it looks like -- yes, so it looks like the CapEx dry dock for Solstad for the next 6 to 7 months will be about $7 million. So in total, you should see us at about $84 million, $85 million.

Okay. And you mentioned also that you will have a new battery vessel converted. So it's -- does it impact your [indiscernible] in general CapEx. Will that increase significantly or...

No, that was already budgeted.

Yes, that was already part of our budget, yes.

Okay. Great. And then I had another question about the new bank loan. Is that -- in those $325 million, is your super senior bank debt included? Or it's -- because you have a $25 million under own facility, if I am correct.

Yes, that will still stay in place.

Okay. And you mentioned that you will amortize it. I didn't quite catch the amortization schedule. Could you repeat on that?

Yes. Amortized is down to $75 million towards the end of the third year.

And can you give us a little bit more color what kind of like other financing you will be raising?

So we'll see what the secured and unsecured markets provide for us. But at the end of the day, we'll do what's best for -- to maximize our shareholder value.

Right. And just 1 last for me. Like you mentioned that the bulk of the Solstad fleet is in the North Sea. So is it like rational to assume that it will stay in the North Sea, especially now that summer season is approaching?

Well, I certainly think so, but let me just kick that over to Piers. He may have some creative ideas of where that fleet would go.

No. I think for the moment, the vessels will stay where they are. And we're expecting, as I said earlier, we're seeing a very strong season, strong market coming out of the North Sea at the moment.

There are no further questions. At this time, I'll turn it over to Quintin Kneen for any closing comments.

Well, Chris, thank you, everyone. Thank you, if you have any follow-up questions, please reach out to West or Sam.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.