Tidewater Inc

NYSE:TDW

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to West Gotcher, Senior Vice President of Strategy, Corporate Development and Investor Relations. You may begin.

[West Gotcher, executive]

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, Quintin 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 and 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 Quintin.

[Quintin Kneen, executive]

Thank you, West. Good morning, everyone, and welcome to the Second Quarter 2024 Tidewater Earnings Conference Call. Second quarter revenue nicely exceeded our expectations, driven by stronger-than-anticipated day rates with printed day rates exceeding our forecast by nearly $800 per day. The second quarter marked the highest ever printed day rate 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 day rates, 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. Day rate improvements were broad-based with each of our vessel classes in each of our geographic segments posting sequential day rate improvements. The continued day rate strength across each of our vessel classes and geographic segments speaks not only to the robust vessel demand, but through the persistent hates 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 day rate 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 ripped for doing this, but the industry moves quickly and keeping a weather eye on the movement in 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 has slightly improved in 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. West 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 and activity in our region suddenly shifts. And Sam will give you insights on how we see our operating costs going down over the next 2 quarters. In addition to the above, West 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. And 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. And 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 these 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. West 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 a 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, subsidy projects, floating production and 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 in 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. And with that, let me turn the call over to West, Piers and Sam for additional commentary and our financial outlook.

[West Gotcher, executive]

Thank you, Quintin. Following Quintin'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 end of the program to $47.7 million. The authorize share repurchase program and remaining capacity represents a maximum amount permissible under our existing debt agreements. To date, we've 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 3 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 that 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 that 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 with them a given vessel class. In this quarter, we had a relatively large number of contracts with the smallest vessels within our small vessel classes and earned new contracts, bringing down the quarterly composite average day rate. It's worth noting that our large and medium classes of PSPs and large and medium classes of banker handlers all had high single 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 billion to $1.41 billion and a 51% gross margin. We now anticipate that third quarter revenue will be 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 counter seasonal step-up into the fourth quarter, in line with our prior expectations as the way projects commence and as our dry dock days declined materially. Given the revised Q3 revenue guidance, we now expect gross margins to be up about 1 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 for drydocks. With that, I'll turn the call over to Piers for an overview of the commercial landscape.

[Piers Middleton, executive]

Thank you, West, 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 were 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 nonetheless 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 5 months, which was lower than previous quarters and lower than we had planned for at the beginning of the year. Our expectation was that 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 in 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 with the expectation of them going through late in 2025. On top of that, all those projects will be supported by our 2 larger PSC classes which, as West mentioned earlier, are our highest earners in the fleet. So projects pushing to the right in one geography is variable. 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 are 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 informed that all 5 will be off-hired immediately. Within the week, our local commercial team have found work for all 5 vessels at higher day rates to customers in the wider Middle East region. We will suffer some items time in Q3 as these vessels reposition, but our outlook for 2024 for the performance of this region is intact as 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's more value in waiting for the work to commence than to reposition both specifically. 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. And if a customer needs additional vessels, then this 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 [indiscernible] moving to different regions to support the SiP projects I mentioned earlier so that they can be in place to support drilling programs in late Q3 early Q4. A short-term chartering strategy does hold some risks, we 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.

[Samuel Rubio, executive]

Thank you, Piers, and good morning, everyone. At this time, I would like to take you through our financial results. And as in previous calls, my discussion will focus primarily on the quarter-to-quarter results for 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 $19.63 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 crude costs as we moved a couple of vessels into Australia, where crude cost remains higher than our other regions. Fuel costs related to just under 2 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% and 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. Drydock activity is still heavy in Q3, but in Q4, we do see utilization increasing and costs decreasing as a result of a much lighter drydock 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 1 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 cost to be about $107 million, which includes approximately $14 million of noncash stock compensation. In the second quarter, we incurred $40.1 million in deferred drydock costs compared to $40 million in Q1. We anticipate for the third quarter drydock cost of about $39 million and about $14 million for the fourth quarter. Drydock costs for the full year 2024 is expected to be about $133 million. Drydock 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 of 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 5 segments. I refer to the tables in the press release and segment footnote and results of operations and discussions in the Form 10-Q for details of our region's results. To summarize the results, our region day rates 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 day rates 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 Kneen, executive]

Thank you, Sam. Mandeep, if you would please open it up for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jim Rollyson with Raymond James.

[James Rollyson, analyst]

Quintin obviously, a little disappointing when things get pushed to the right versus what was planned, but out of your control, obviously. And it sounds to me like that hasn't really changed. So timing will push into 4Q start-up 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 '25 and even beyond. And in response to that, I'm also curious just what you think the risks are to the start-up 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 Kneen, executive]

That's absolutely correct. And similar to what you may have heard on other conference calls around 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 going to slow down. I don't even see when it's going to slow down in '25 or '26, still look just as optimistic as they always have.

[James Rollyson, analyst]

Got you. And then on the leading-edge rates, obviously, the composite number was kind of mix 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 were kind of fourth quarter, first quarter, you were up 3%, 4% collectively. And this quarter, that number was probably double that in the high single to low double digits. Correct me if I'm wrong there. And also just on the Middle East, maybe a little bit of context of how much of that's been re-contracted just so we can think about that mix impact going forward.

[Quintin Kneen, executive]

No, absolutely. I'm going to give it over to West because he studies this more deeply than anybody. And then Piers could probably comment a little bit more on the Middle East contract role.

[West Gotcher, executive]

Yes. Thanks, Quintin. So as it relates to the first part of your question on the leading-edge day rates for the larger class and medium classes of the PSVs and anchor handlers. That's a fair characterization. The continuing momentum in those rates, I think, was quite good. Again, kind of high single digit to low teens, which is a pace that I think we're pretty pleased with, broadly. So the pace of improvement for those vessels, I think, is 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 happened to recontract in the same period. And so, when you look at that, it was nearly 30% of the contracts were in 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 that's just kind of the way things work 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 comfortable with.

[Operator]

Our next question comes from the line of Greg Lewis with BTIG.

[Gregory Lewis, analyst]

Thank you for the guidance and the commentary to kind of get us there. But I was hoping -- I realize we got to get through Q3 before we start thinking about Q4. But I mean, you did mention that that kind of, I guess, 58% gross margin exit rate in Q4. As I think about that, in terms of sequencing, I'm assuming that's more of like a December exit than, say, a Q4 exit? And then just to kind of help us understand that a little bit. And then I guess, Quintin, I mean it's definitely bullish times in the PSV market. But of course, any kind of commentary around what those gross margins look like in that 58% range versus maybe where you've seen them in previous cycles and just kind of curious on your views around give us a little bit of a history lesson there.

[Quintin Kneen, executive]

Okay. Well, we're going to answer this in a team format, Greg. And Greg good to talk to you again. So it is an interesting time because the other element that I would add to the discussion in context of how the gross margin is going to be accelerating over the second half of '24 is that this is a very heavy drydock here. So we've been spending -- I think we spent over $80 million in the first 2 quarters on drydock. I think we've got another $30-some-odd million in Q3. And then once those boats that are in dry dock free up and go back on to their contracts, that naturally just increases revenue in the fourth quarter. So we had this benefit that's naturally going to pop in Q4, which is all these boats that have been in drydock 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 has alluded to and then West has also talked about. And then in combination with that, we've had 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 that had a couple of a settlement of a lower customs case in West Africa and then another element related to...

[Samuel Rubio, executive]

The write-off of the America...

[Gregory Lewis, analyst]

Yes, right. I'm going to talk about that one in a second. So we had a write-off of some crude 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. Now as it relates to like the margins of where they go where they peak, listen, I hope we don't see it quite frankly. I hope it keeps on going, but it's very natural for me to see a business of this type, that's earnings cost of capital, getting a 70% margin over time. 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. 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 even rolling the third quarter. And Saudi Arabia decided they were going to 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 the mob costs associated with when we move those votes into it and that's what Sam was talking about that 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 goes to 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 peers repositions us to take advantage of newer contracts.

[Operator]

Our next question comes from the line of Fredrik Stene with Clarkson's Securities.

[Fredrik Stene, analyst]

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 bases are up, you amplify 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 contracting volume and that mix -- did you have more vessels, larger vessels to sign this quarter that could have brought that average up again? Or was this just arbitrary quarter where you only have 21 vessels to recontract and that's why we got this higher volume of the lower vessels. So any additional commentary on that would be super helpful.

[West Gotcher, executive]

Yes. Fredrik, it's West. As I kind of alluded to, to some degree, again, the vagaries of having 213 discrete assets, but we contracted for various lengths of time at different points in time. And so, in any given quarter, you can have a mix that shifts one direction or the other. We did mention, as we talked about in the Middle East, we had a number of vessels come off of the long-term contracts early. That is a bit unusual. And so, you have a higher preponderance of vessels recontract and perhaps normally would have, right, if they would have gone to the end of their contract life. So I don't know that there's a rule of thumb -- could there have been a few more boats that -- a larger boats to your question that could have contracted. But for the project delays yes, perhaps. But I think it's important to remember that with 213 boats, 7 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 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 and what's contracting during a given time period.

[Samuel Rubio, executive]

I absolutely agree with West as it was more about one thing is that you have a higher number of smaller vessels coming or being re-contracted, but also you had a negative effect on the other side if there was, again, by chance, just in the quarter where you had fewer available larger vessels to recontract, which would also have a skewing effect on that average number.

[Fredrik Stene, analyst]

Okay. Quintin you also mentioned a 5-month average contract length. Do you think, on average, you'll go much lower than that going forward? I guess for you guys, it's all about managing -- having some baseline coverage and also being able to play the market, but if you have to recontract half of the -- or the fleet to -- each rental 2 times each year, it's a lot of re-contracting to do. So any thoughts on that?

[Quintin Kneen, executive]

Well, I think I'm going to 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, executive]

Yes. Fredrik. A little lower than we would normally expect. I mean, I think previous quarters, we've been at 9 months or so is where we've been going as a general comps sort of across the whole fleet, we still at 18 months. But we're starting to see some slightly longer-term contracts. I mean, drilling is generally short term anyway and construction as well. So I think this was actually to jump on a bit of West's points from earlier. You just have quarters sometime which are just a little bit different. But I think that was the case with Q2. We ended up with some smaller vessels re-contracting and some of the contracts are just a little bit shorter than we'd normally see. But I don't think overall, our strategy is going to change. We're still very positive about the long term for this market. So that gives us opportunities to continue to drive rates. But yes, we'll see how we go through the next few quarters. But at the moment, I think we're just happy with where we are at the moment, and we're still very positive to the market going forward into '25 and '26.

[Fredrik Stene, analyst]

Super helpful. And the final one for me, which relates to day rates going forward. I think you're right in the report that 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. And I think for your -- the average rate you reported this quarter, that's around $21,000 per day. Second quarter last year was $16 million. 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 saying that we in the second quarter 2025 should expect average reach to be around $26,000?

[Quintin Kneen, executive]

All right, Fredrik, you're given a little ahead there. I mean I think it's in that $3,500 to $4,500 range per year. I think that's what we can push it. And then that's about where we've been at the last 1.5 years or so. I don't want to get everyone too excited. But yes, I do believe that, that momentum that we're talking about is there, and we continue to capitalize on it. And I look forward to delivering on it.

[Fredrik Stene, analyst]

I framed the question I got that on purpose, but I guess around $40 per day, it's also addressable.

[Operator]

Our next question comes from the line of David Smith with Pickering Energy Partners.

[David Smith, analyst]

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 that this impacts your average utilization expectations for '24.

[Samuel Rubio, executive]

Dave, this is Sam. So the Q3 expectation in write-off, 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 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 the overall Q3 amount of days is probably around 300 extra days in the quarter than what we originally anticipated.

[David Smith, analyst]

Okay. Not really have a higher expectation of dry dock days for the year, is that right?

[Samuel Rubio, executive]

There will be our expectation of drydock days in the year, yes. Again, some of it was because of some of the delays that we have seen in the dry docks, but again, just because of the timing of the way they're getting pushed.

[David Smith, analyst]

I appreciate it. And then I wanted to make sure I understood correctly that Q3 revenue is expected to 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.

[Piers Middleton, executive]

That's right. We expect Q3 revenue to be roughly flat. And as we said in the prepared remarks, a nice step up in Q4 and that Q4 expectation kind of qualitatively around our revenue is not dissimilar to what we anticipated previously. And I think if you think about it conceptually, the projects that we anticipated to start in Q3 that would have run into Q4 are now starting late Q3, early Q4, which will allow for that revenue to be realized in that period.

[Operator]

Our next question comes from the line of Josh Jayne with Daniel Energy Partners.

[Josh Jayne, analyst]

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 just 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 Kneen, executive]

Well, we haven't given full guidance on '25, 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 the [indiscernible] into what you were saying, which is as day rates continue to improve, I don't see them pulling back in '25. 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 '24 to '25 is '24 is our heaviest drydock year in the 5-year cycle, and '25 is going to be our lightest. So the vessels that have been off-hire in the first half of the year, first 9 months of the year and the money that we've been spending on repairing the vessels and fixing them up, we won't see nearly that amount as we go into '25. So there's going to be more vessel uptime, there's going to 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, analyst]

Understood. And you alluded to it earlier, some of the contracting delays that we've seen and things being pushed to the right in offshore drilling world. Could you just -- maybe you could talk about the reasons for the delays again? You talked that 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 looking forward would be great.

[Quintin Kneen, executive]

All right. Well, I'm going to 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 I'll follow up.

[Piers Middleton, executive]

Thank you. I mean from a project point of view, we saw a number of projects just getting pushed to the right because I think as Quintin alluded to in his comments earlier, that's the logistics and supply chain project planning, perhaps from our customers was not as speedy as perhaps they had envisioned. And I think 1 or 2 customers don't really want to be specific on areas, but 1 or 2 customers couldn't get a hold of drill pipe, for instance. So they end up saying, are we going to have to delay the project? Or we -- things like that were going to get hold of a rig, and it's just planning more than anything else and the everything got pushed 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 60 to 90 days. So we didn't see any cancellations. So nothing sort of worry about, but Q4 definitely looks 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, it's not absolute in each of the regions we're operating in. But I would say our customers the IOCs now got themselves better organized, and I think they've got pretty good visibility for '25 and '26 in all the regions. And I think we'll see a big uptick in sort of activity in everywhere we operate in all the sort of main areas. So we're very positive. I think '24 was shuffling around more than anything else in the planning ends up being a bit more planning than was expected. So visibility-wise, we're pretty positive as we go into '25 and '26 with the rig in all the regions we're in.

[Operator]

Our next question comes from the line of Don Chris with Johnson Rice.

[Donald Crist, analyst]

I wanted to ask about the M&A market. In past calls, you said that you 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 Kneen, executive]

I don't want to say too much because that situation that you illustrated still remains right. But obviously, we're looking to make sure that any deal we do raise value to our shareholders. And for us, we can make a tremendous amount of money with the 200-plus vessels that we have. The day rates that we're talking about, the margin expansion, there's a tremendous amount of value that's going to be created as we roll through '25 and '26 just with the existing fleet. So when I look at potential acquisitions, focused on a particular geography or a 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 they have been trying to demand more than I think that they're worth at the current time. And so, we're just seeing disciplined. And 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. And so, we're just -- I would suffice it to say the words being very price disciplined, but we're continuing to be very active in the market.

[Donald Crist, analyst]

Okay. I appreciate that color. And just one more for me. It seems like you're going to generate significant free cash flow over the next 12 to 18 months. And just your thoughts around what you would deploy that capital into? Would it be share repurchases? Or would you just kind of build cash or maybe pay down debt, et cetera? Just your thoughts around uses for that free cash flow?

[Quintin Kneen, executive]

Well, we're not going to build cash. We'll certainly keep cash as necessary for liquidity and so forth. I don't think that we are over levered at this point in the cycle. So as a result, that cash is either going to get deployed into value-accretive acquisitions that we were just talking about, if I can get them done, if we can get them done or we were returning that money to shareholders.

[Operator]

Our next question comes from the line of Magnus Anderson with Fearnley Securities.

[Magnus Andersen, analyst]

So a follow-up on the leading-edge rates 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 rates for the lower spec classes?

[West Gotcher, executive]

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 re-contracted in the Middle East, as we noted in the press release, the rates that we realized by re-contracting vessels quickly were on average 29% higher. Now it was off a much lower base, right? Because again, these are the smallest vessels and 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 re-contracted quickly at meaningfully higher day rates. It just so happened that given the distribution and given the nature of these assets that 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 terminated, right, and quickly re-contracted. 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 re-contracted quickly. There's some, I think, some positive elements there. But again, just given the nature, as we talked about, not all rates are uniformed even within vessel classes, that just happened to weigh down the leading edge there for the quarter.

[Operator]

That concludes our Q&A session. I will now turn the call back over to Quintin Kneen for closing remarks.

[Quintin Kneen, executive]

Well, thank you, everyone, and we will update you again in November. Goodbye.

[Operator]

This concludes today's call. You may now disconnect.