Welcome to the Earnings Conference Call Second Quarter 2019. My name is Adrianne and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions] Please note, this conference call is being recorded. I’ll now turn the call over to Matt Mancheski. Matt Mancheski, you may begin.

Thank you, Adrianne. Good morning, everyone, and welcome to Tidewater’s earnings conference call for the period ended June 30, 2019. I’m Matt Mancheski, Tidewater’s Vice President of Investor Relations and Corporate Development. I’d like to thank you for your time and interest in Tidewater. With me this morning on the call are our President and CEO, John Rynd; Quintin Kneen, our Chief Financial Officer; Jeff Gorski, our Chief Operating Officer; and Bruce Lundstrom, our General Counsel. For today’s call agenda, I’ll cover a few formalities and then turn the call over to John for his prepared remarks followed by Quintin’s review of our financial results for the period. Following John’s closing comments, we’ll then open up the call for questions. During today’s conference call we may make certain comments that are forward-looking and not statements of historical fact. There are – there are risks and uncertainties and other factors that may cause the company’s actual future performance to be materially different from that stated or implied by any comment that we make during today’s conference call. Please refer to our most recent Form 10-Q for any additional details on the – these risk factors. This document is available on our website or through the SEC at sec.gov. Information presented on this call speaks only as of today August 13, 2019, and therefore you’re advised that at any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we will present both GAAP and non-GAAP financial measures. The reconciliation of GAAP to non-GAAP measures is included in last evening’s press release. With that, I’ll turn the call over to John. John?

Good morning, everyone, and welcome to the Tidewater earnings call. The second quarter was a testament to the strategic rationale the GulfMark combination completed towards the end of last year as demonstrated by the margin growth of the combined company. The North Sea market and deepwater vessels more broadly, both segments that were enhanced through the acquisition, showed continued strengthening during the quarter. In addition, the increased scale allowed for good cost control both on and offshore, resulting in margin expansion relative to both prior quarter in the same time last year. While the seasonal North Sea market strengthened earlier than anticipated and has since moderated to more normalized levels for this time of the year, we believe the continued trend of activity levels, which impacts rates and utilization, are moving in the right direction albeit at a pace that is slower than desired. Revenue was up slightly over the prior quarter due to average day rate increase of $636 per day and active utilization following about 1.3 percentage points. This is the second consecutive quarter, where worldwide average day rates have increased after having consistently declined since the onset of the downturn in 2014. The utilization decline is largely attributable to having 784 active days out of service due to drydocks and reactivations, an increases of 394 days over the first quarter. This difference of 394 days amounts to approximately 2.6 percentage points in active utilization drag relative to the first quarter, resulting in active utilization that is otherwise slightly ahead of the first quarter, but for the additional dockings. We continue to highlight the significant drydock obligations for ourselves and the industry as a whole, where we estimate that approximately 450 currently active OSVs have or will come due in 2019 for special survey and another approximate 425…

Thank you, John, and greetings, everyone. I thought I would open by reinforcing from the financial perspective some of John’s comments and reiterating what makes us different. First of all, we have a rock-solid balance sheet. We closed the quarter with $383 million of cash. We do have $435 million of debt, the bulk of which matures three years from now in August 2022, but we’re easily able to service the debt and can easily refinance the debt in connection – in conjunction with our cash on hand. We have no plans to alter our loan debt position until the recovery is much further along. We do have covenants and those covenants get tighter over the next six quarters, but we are performing well above the required levels today, and we’re performing today above the tightest those covenants get over the tender of the debt. We have no required CapEx. We have no vessels under construction. Every investment we make is our decision based on today’s economics, and we have no concern about shrinking the fleet in order to grow return on capital. We have been free cash flow positive year-to-date, and we anticipate being free cash flow positive on an annual basis. In addition to all that, we are pleased with the continued quarterly improvement of the core business. We’re not satisfied, but we’re pleased. Revenue was up again quarter-over-quarter and average day rate was up substantially. Operating expenses were down overall. Operating expense per active day was down. G&A expenses were down and remain below the Tidewater standalone pre-merger levels. These metrics are all going in the right direction, but we are still not satisfied and we are continuing to work to improve all of these metrics each and every quarter as we go forward. Working capital investment…

Thank you, Quintin. We’re optimistic that we’re investing in the right people, processes and vessels to thrive through this protracted downturn and beyond. This includes responsibly reducing costs, while ensuring that operational performance remain the industry leading. Additionally, we will maintain active supply on the basis of its economic viability and will not chase market share at the expense of profitability. This discipline by us and other market participants will continue to facilitate the needed recovery in day rates that has begun evidencing itself the past two quarters. While we cannot predict the pace of the recovery, we see reasons for optimism in each of our markets and believe – we believe that we are in the best position to capitalize on the fundamental improvements. Adrianne, please open the call for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Turner Holm from Clarksons Capital. Your line is open.

Hey, there, guys. Good morning. This is Turner Holm from Clarksons Platou.

Good morning.

Hey, John, I just wanted to drill into your last comment of your prepared remarks that you see reason for optimism in some of the – basically all the markets that you mentioned. And what we’re hearing is maybe some flattening of leading-edge day rates and in particular markets, perhaps seasonal in the North Sea. But the guidance is for maybe flat to slightly down day rates for the third quarter. Can you kind of just flush that out a little bit how you’re thinking about that? Is it activity-related, or is it sort of leading-edge day rates that you’re seeing?

I think it’s a combination of things, Turner, I think, one, every market we participate in is on solid footing right now. And really the driver of our slight reduction in average day rate in the third quarter is more as a result of coming off those legacy term contracts in higher data rates, not a reflective of where leading-edge day rates are. And as you know, we guided the fourth quarter day rate back up slightly since we see improvement in every major market. Again, some of the seasonality, like you said the North Sea, we’ll watch, the North Sea as we progress into the winter months, West Africa appears to be some – gaining some strength around the world, Brazil is gaining strength, Mexico is gaining strength. The Med is holding solid. So again, the Gulf of Mexico really driven by supply migrating outside of the U.S. Gulf of Mexico has been holding up nicely. So again, as we look around the world, there’s reasons for optimism in all of our key markets.

Sure. Thanks for that. I understand you all took some contracts down in Guyana recently or have some vessels in the way down there, relatively encouraging discovery earlier this week by Tullow. I’m wondering if you all see that as being sort of attractive market and maybe a place to just add some maxi vessels in the next four quarters?

Yes., I think you have to be paying attention to the Guyana area. Actually, our vessels are moving to Suriname for Apache, and then in October, we have a vessel moving into Exxon Guyana for a five-year contract. So that’s a market we’re staying very close to and also obviously, as you mentioned, great news on the Tullow discovery. So I think, obviously an area that’s going to get a lot of tension from us and others.

Thanks, John. And Quintin just one for you. There was some talk earlier in the year about possibly extracting some value from the due from affiliate receivable balance. I know it was quite flat this quarter. Is there anything to report there with regards to possibly monetizing that balance? And yes or no, is that baked into the free cash flow positive outlook for the year?

Yes. We’re still looking and working with our partner and with the long-term holds for that joint venture. I don’t expect that we’ll be extracting significant amount of value out of that particular receivable as we go through the remainder of 2019, but we are working with them on a systematic collection of that receivable. So – but I hope that what we’ll be able to do is formalize that receivable more of a long-term as we go forward and have more of a systematic payment and liquidation of that. But it won’t be some of the significant gains that we have last year from that particular receivable balance.

Okay. I appreciate you guys for taking my question.

[Operator Instructions] The next question is from Patrick Fitzgerald from Baird. Your line is open.

Hi, guys. What’s the – maybe said it, but what’s the average age of your fleet now after all the divestitures?

The average – excuse me, the average age of the active fleet is about 9.8 years. And the total fleet inclusive of the stack fleet is right at 10 years.

Okay. Is there an average, like deadweight tons that you guys could provide?

We’d have to do that offline.

Okay.

Yes, we’ll follow-up with you. But we can – we don’t have that at tip of our fingers.

Okay. So what’s the deferred drydocking expected? You said, it’s going to be remain elevated for 2019 and 2020. What do you expect it to be for the remainder of the year and then what does it look like in 2020?

We expect the total balance for the year approximately be $62 million, and we expect a similar number in 2020 as well. There, obviously, all of those investments will go through a review before they’re made. But based on the age of the fleet and based on the requirements for special surveys, we’re definitely seeing a lumpiness in 2019 and 2020. My expectation is as we go into 2021 that will decrease maybe 20% to 30%, but that will be on a five-year cycle.

Okay. So if there’s a way, I know it’s kind of theoretical, but is there a way to think about, like maintenance CapEx? For your fleet, what it will be at the end of this year in terms of both vessel drydocking and other maintenance CapEx kind of on an annualized basis just to kind of put it – that in a framework?

So the way I would encourage you to think about it is right now, the five-year special surveys are running about average $1.2 million per vessel. And so it depends on the age of the vessel when they hit that survey. But overall, we expect 20% of the vessels every year to hit that $1.2 million, then you’re going to run into a number that – it depends on the active fleet, but it’s going to be in the $36 million to $40 million range. That’s straight line over every period noting that like, for example, in the current year, we’re going to be just about $60 million and maybe the same level in 2020 as well.

Okay. All right. And so, given your guys’s balance sheet, you obviously are in a much better position to handle that, which is pretty, pretty large number per vessel. What – have you seen that impacting some of your competitors assuming they have kind of the same lumpy schedule, maybe – which maybe isn’t true?

Well, I think it is true. And John mentioned in his prepared remarks, I’m actually surprised that we haven’t seen more companies hitting the wall. I’m not sure where they’re getting the money for these drydocks. But it is a highly fragmented industry, and people will do whatever they can to survive in this market. So, obviously, they’re leaning on financial institutions and to some extent, cash flow operations, although a lot of these are still operating just above cash flow break-even. So our anticipation as we go through the remainder of 2019 and 2020, is we’re going to see acceleration and vessel attrition because of their investment required.

Okay. And are you baking that into your day rate projections? Are you just assuming they’re going to come up with the money to continue to operate their vessels? So there could be upside to your – kind of your day rate expectations?

Well, in all of our comments, we’re anticipating a bit of vessel attrition because of that factor. And sometimes, it comes in the form of just increase utilization and sometimes it comes in the form of day rate. But overall, it should be positive to the revenue line on a per boat basis.

Okay. And then I wanted to ask about West Africa. You said you’re seeing some bright spots, I guess, in your comments and – but that was in terms of floaters. The only revenue declined sequentially in the quarter was, I believe, in West African deepwater. So are you seeing kind of more contracts that will be announced on the floater side there, or what gives you optimism there?

I think it’s two parts really. It’s two areas. It’s is Angola and Nigeria. Angola is looking to poise the growth in the back-half of this year and through 2020, and that’ll be more floater-driven. And then if you go to Nigeria, that’ll be more jack-up-driven. That’s where we see the two strongest areas right now is Angola, Nigeria, again, Angola being floater-driven, Nigeria more jack-up-driven.

Okay. Thanks. And then just one more question. Covering the industry on the drilling side hear a lot about improvement in the jack-up space and kind of slower recovery in the floater space. Yet, it seems like your results this quarter, you had more encouraging results on the deepwater side. And, I guess, towing supply vessels were down sequentially. Is that just where you’ve chosen to kind of sell vessels related to kind of smaller older vessels, or what’s the read through there that we should be taking away from this?

Yes. I think one thing when you take a look at just this depict the deepwater vessels, not all of our deepwater vessels are supporting floaters. If we have an opportunity to put it to work with – on a jack-up contract or a pipeline contract or a construction contract, we’ll do that. That’s just an internal nomenclature how we track those vessels. The towing supply was down quarter-over-quarter. Some of that was just in and out of in both West Africa and the Middle East. But if you look at the Jack-up rig counted growth is right now, it’s been in the Middle East and it’s coming to West Africa, specifically to Nigeria.

Okay. And is there anyway to frame it down?

And the North Sea is a deepwater PSV market, and that’s where we had our strongest market.

Yes, sorry. So just – is there anyway to break down, like how much revenue you get from floaters versus jack-ups, just even a ballpark would be helpful?

Patrick, we don’t track it offhand. It’s pretty well diversified in terms of Tidewater revenue stream between construction activities, production support and then the drilling activities split between jack-ups and floaters.

Okay. All right, fair enough. Thank you very much.

Thank you, Patrick.

And this concludes the question-and-answer session. I’ll turn the call back over to Matt Mancheski for final remarks.

Okay. Thank you, Adrianne, and thank you for everyone that participated in the call. We look forward to your continued participation in Tidewater stock, and thank you for your interest in the company.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.