Tidewater Q3 2026 Earnings Conference Call - TIDEWATER INC

Financial Performance:

• Third-quarter 2026 revenue reached $360.4 million, exceeding expectations and including one month of revenue from the Wilson Sons acquisition.
• Gross margin came in at 46.8% (48.0% excluding Epic Purity costs), nearly a percentage point above guidance.
• Free cash flow surged >40% sequentially to $91 million, driven by improved collections, lower capital expenditures, and working capital benefits.
• Net leverage remains strong at under 0.9x; liquidity stands at approximately $650 million, including a $250 million revolver.
• Weighted average leading-edge day rate rose >12% sequentially to >$27,000 per day, marking the third consecutive quarter of growth.
• Operating costs totaled $191.6 million, increased by ~$10 million due to Wilson Sons integration and higher dry dock/repair days, though war-related costs declined ~50% sequentially.
• Capital expenditures for the quarter were $9.4 million, with full-year 2026 guidance lowered to ~$47 million.
• Adjusted EBITDA reached $140.1 million, up from $135.5 million in Q2.

Guidance and Future Outlook:

• Revised 2026 full-year revenue guidance to $1.43–$1.44 billion; gross margin guidance set to 47.5–48.5%.
• Issued new 2027 revenue guidance of $1.70–$1.75 billion with gross margin guidance of 51–53%.
• Q4 2026 revenue expected to rise ~11% sequentially, though partially offset by ~3% headwinds from downtime, repairs, and capacity reductions.
• Full-year 2026 revenue is covered by firm backlog and options at ~99% of the midpoint, with 78% of available days secured.
• 2027 backlog represents $1.1 billion (~64% of midpoint), with 54% of available days captured.
• Management anticipates a sequential revenue pickup in 2027 starting in Q2, with margins improving through the year due to operating leverage.

Business Segments and Product Lines:

• Successfully closed the Wilson Sons acquisition on September 1st; integration is on track to be fully completed by January 2027.
• The combined fleet now comprises 226 ships, with 212 OSVs; 67% are high-specification (16,000 BHP anchor handlers or large deck PSVs).
• All three core activities—Production, Subsea, and Drilling—are poised to grow through 2027, with drilling expected to accelerate in the second half of 2027.
• New contracts signed in Q3 included 29 term contracts with an average duration of ~11 months.
• Brazil operations are expected to see a delayed ramp-up in Q4 and Q1 2027 due to post-election tendering timelines, but long-term demand remains robust.
• Americas segment gross margin increased 2 percentage points to 43%, significantly boosted by the Wilson Sons acquisition.

Market and Competitive Landscape:

• Global OSV market fundamentals remain favorable with tight supply, high utilization, and rising secondhand vessel prices.
• New-build PSV supply is limited, with only a few deliveries in 2026; no significant threat to supply discipline expected in 2027.
• Rig demand has risen 3% YTD to 526 rigs, with projections reaching 541 rigs by end-2027 (90% utilization).
• Regional momentum: Europe/Mediterranean rates up 6%; APAC rates up 8% to $37,858/day; Middle East rates up 1.3% despite geopolitical friction.
• US Gulf market remains soft, while Suriname/Guyana contracts are starting to offset exposure.
• Management views the shift toward regional energy security and local content requirements as a long-term tailwind for their global platform.

Risks and Challenges:

• "Operation Epic Fury" in the Middle East continues to impact costs; $5.6 million incurred in Q3 with expectations of $5 million in Q4.
• Direct conflict-related costs (insurance, wages) are estimated at ~$15 million year-to-date, with only ~$600k collected on $7 million in billable reimbursements.
• Unplanned dry dock and repair days negatively impacted utilization by ~5 percentage points in Q3.
• Geopolitical instability in the Middle East and election-related delays in Brazil create uncertainty for short-term contract timing.
• Potential for fleet attrition over the next decade as older vessels (>25 years) are retired without sufficient new builds.

Management Commentary and Tone:

• Tone was confident and optimistic, emphasizing "momentum" as the quarter's headline.
• Management highlighted a "flight to quality" strategy, leveraging their high-spec fleet to command premium day rates.
• Capital allocation prioritizes value-accretive M&A first, followed by opportunistic share repurchases (25 million shares repurchased post-closing).
• Leadership expressed strong belief in the "runway" for day rate growth on the Wilson Sons fleet as it rolls over to market rates.
• Disclosed a disciplined approach to M&A, noting less interest in the US Gulf due to pricing and more interest in Africa and Asia.

Analyst Questions and Answers:

• Contracting Strategy: Clients are pushing for longer terms at lower rates, but management is refusing to discount rates for longevity, noting tight supply limits client options.
• 2027 Rate Assumptions: Embedded 2027 guidance assumes a ~$2,700/year-over-year day rate increase, with sequential growth expected as contracts roll over.
• M&A Focus: Future M&A targets are shifting from the Americas to Africa (specifically Nigeria) and Asia, driven by value and performance potential compared to current US Gulf pricing.
• Subsea/Drilling Torque: Drilling and subsea construction are identified as primary drivers for day rate expansion and future growth.
• Fleet Age: Management is positioning to benefit from global fleet attrition by having acquired the "youngest" fleets available in past M&A transactions, creating a durability advantage.

Other Key Points:

• Share repurchase capacity remaining under the $500 million authorization is ~$475 million.
• Wilson Sons assumed debt totals $224.5 million with low interest rates, including principal amortization starting in Q4 2026.
• The company remains the only truly global OSV operator with a "boots-on-the-ground" footprint in every region.
• Dry dock costs for 2027 are projected at $147 million, including $18 million related to the Wilson Sons fleet.