Q1 2024 Tidewater Inc Earnings Call

Participants

West Gotcher; Senior Vice President of Strategy, Corporate Development and Investor Relations; Tidewater Inc

Quintin Kneen; President, Chief Executive Officer, Director; Tidewater Inc

Piers Middleton; Chief Commercial Officer, Senior Vice President; Tidewater Inc

Samuel Rubio; Chief Financial Officer, Executive Vice President; Tidewater Inc

Jim Rollyson; Analyst; Raymond James & Associates, Inc.

Fredrik Stene; Analyst; Clarksons Platou Securites AS

David Smith; Analyst; Pickering Energy Partners LP

Josh Jayne; Analyst; Daniel Energy Partners LLC

Sherif Elmaghrabi; Analyst; BTIG, LLC

Don Crist; Analyst; Johnson Rice & Company L.L.C.

Presentation

Operator

Thank you for standing by. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the Tidewater First Quarter 2020 Earnings Conference 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again.
Thank you. I would now like to turn the call over to West Gotcher, Senior Vice President for Strategy, Corporate Development and Investor Relations.

West Gotcher

Good morning, everyone, and welcome to Tidewater's First 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 additional details on these factors. These documents are available on our website at TVW. dot com or through the SEC at SEC.gov. information presented on this call speaks only as of today, May third, 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 on our earnings release press release earnings press releases located on our website at TDW. dot com.
And now with that, I'll turn the call over to Quintin.

Quintin Kneen

Thank you, West, and good morning, everyone. Welcome to the first quarter of 2024 Tidewater Earnings Conference Call. First quarter revenue and gross margin meaningfully exceeded our expectations. Both day rate and utilization outperformed our expectations we are certainly pleased with the performance as the first quarter of a given calendar year is typically the slowest from an activity perspective, given the typical seasonal factors impacting a few of our operating regions. We take advantage of this period of front-loaded drydock schedule, which serves to prepare our fleet for this year, work season later in the year. This first quarter not only exceeded our expectations but exceeded the fourth quarter and the fourth quarter exceeded the third quarter. Sequential improvement through the typical slow period is the strength of the cycle overwhelming the calendar year seasonality, the seasonality is still there, but the increased average day rate from contracts rolling onto higher rates more than offsets the effect dayrate momentum during the first quarter was broad-based with each of our vessel classes, posting strong sequential growth, particularly in our large class of anchor handlers.
Day rate momentum for this class of vessel was consistent across multiple regions with a composite rate for this class, up about 27% for large anchor handlers are primarily used to support the mobilization and movement of drilling rigs and typically benefit the most busy or more seasonable pay-per-view favorable periods in the second and third quarters first quarter. Also results first quarter results also indicate that the supply of large anchor handlers is persistently tight, and that's a continual rolling of all vessels onto new leading-edge contracts will continue to drive up the printed quarterly average day rate.
During the quarter, we repurchased $3.5 million of shares on the open market. And subsequent to the end of the first quarter, we repurchased an additional $12.5 million of shares on the open market in addition to the open market repurchases, we used $28.5 million of cash to buy shares from employees so that they can then pay the associated tax benefit with the vesting of their equity compensation in lieu of those employees just issuing those shares into the open market. So year to date, we've used $44.5 million of cash to reduce the share count by about 492,000 shares. We remain opportunistic on share repurchases, and we'll continue to weigh the merits of share repurchases against other capital allocation opportunities, both relative to our view of the intrinsic value of the shares and against other capital allocation opportunities that may present themselves. We continue to pursue acquisitions, but thus far our share repurchases have been the most value added use of capital. And our focus for acquisitions remains on companies 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 first quarter, and we remain opportunistic excuse me, optimistic on the continued pace of offshore activity acceleration as a result of the constructive leading indicators we observed during the first quarter, coupled with the persistent tightness in vessel supply and lack of newbuild activity, we will remain focused on driving free cash flow generation, and we'll continue to deploy capital into those alternatives that maximize shareholder value.
And with that, let me turn the call back over to West for additional commentary and our financial outlook.

West Gotcher

Thank you, Glenn. To provide some additional context on our share repurchase program, we are pleased to announce that our Board of Directors has authorized an additional $18.1 million of share repurchase capacity. This incremental authorization, combined with our remaining authorization from the last announced authorization provides for $50.7 million of authorized ship authorized share repurchase capacity. The outstanding and authorized share repurchase program represents the maximum amount permissible under our existing debt agreements. To date, our capital allocation philosophy has been governed by our free cash flow generation beyond the intrinsic value of our shares relative to where our share shares trade on the market, our current debt capital structure and competing capital allocation opportunities.
Our current debt capital structure is reaching a point at which we believe there is an opportunity for us to evaluate steps to establish a long term debt capital structure more appropriate for a cyclical business and to allow for additional shareholder return capacity irrespective of the complexion and flexibility of our capital structure, the guiding principles of our capital allocation philosophy and will remain consistent we will remain rigorous in evaluating the relative merits of each opportunity we look at to pursue the most value accretive uses of our capital.
In addition, we will remain mindful of our balance sheet, maintaining a clear line of sight to a net cash position in about six quarters for any capital allocation decision we make during the first quarter leading edge day rate momentum continued to improve nicely to $30,641 per day. We entered into 19 term contracts during the quarter with an average duration of about nine months. We anticipate that we will continue to seek continued improvement in leading-edge day rates as we progress through the year, given the persistent tightness in vessel supply and increasing chartering activities reapproach the busier quarters of the year. We remain confident that we can achieve average day rate to improve by approximately $4,000 per day on a year-over-year basis.
Looking to the remainder of 2024. We reiterate our full year guidance of $1.4 billion to $1.45 billion of revenue and a 52% gross margin as we progress through the year, we now anticipate revenue to increase slightly in the second quarter due to better than anticipated revenue performance in Q1 and to the pull forward of some drydocks, the mobilization of a few vessels and some unplanned maintenance in the second quarter. We still anticipate a meaningful step-up in revenue in the third quarter and continued strength into the fourth quarter.
Similarly, we anticipate relatively flat gross margins in Q2 due to the factors previously described, but expect about seven percentage points of margin expansion in Q3 and maintain our expectation of Q4 gross margin exit rate of 56% in the fourth quarter, setting us up well for continued margin expansion as we enter what is expected to be an even stronger market in 2025. Our backlog currently sits at about 930 million of revenue for the remainder of 2024 with 74% of available vessel days contracted for the remainder of the year with our largest classes of PSVs and anchor handlers, having the most exposure to contract repricing opportunities throughout the remainder of the year.
With that, I'll turn the call over to Piers for an overview of the commercial landscape.

Piers Middleton

Thank you, West, and good morning, everyone. This quarter I will talk a little about what we are seeing in each of our regions as we look out to the rest of the year and into 2025.
Overall, the outlook for the OSV market remains strong with the ongoing upturn and project investments expected to continue to drive additional incremental demand out beyond 2026, while the limitations in the supply of any additional OSVs to the global fleet will further exacerbate the tightness in the OSV space. So far, this tight supply demand balance has been reflected positively in our rates for Q1 2024 by pushing our feet comps of day rate up by almost $1,497 per day compared to Q4 2023. And furthermore, based on our outlook to the market. We see no need to move away from our current short term chartering strategy that we've been very vocal about over the last few years.
And again, this has been reflected in Q1 with our average charter length for new contracts remaining in the nine-month period, which was the same as we saw in Q4 2023, working through our various regions and starting with Europe, the North Sea spot PSV market has been a little slow to pick up in the first few months of the year, which is not unusual for Q1. However, that was offset by stronger demand on the term side of the business, both in the UK and Norwegian sectors for PSVs, with charters coming to the market earlier in the year to make sure they have the necessary cover over the busy summer periods. And through Q3 and Q4 on the large anchor handlers, we saw rates reported hitting about GBP120,000 per day mark during Q1 and with indications that a number of projects that were delayed 2023 and now plan to start in 2024, which bodes well for our large anchor handlers for the remainder of the year.
In Africa, even with the busy drydock schedule in the region, we had a strong Q1, predominantly led by increased drilling activity in Angola, Namibia and Senegal, which required to support our larger anchor handlers and PSVs in the region. We expect some slowdown in Q2 and drilling demand in the region as rigs repositioned to different countries in Africa, the sea drilling restarting in full force again, as we move into the second half of 2024 and out into 2025 in the Middle East. With the recent news in Saudi Arabia, we may see some short-term demand slowdown, specifically related to work in the Kingdom however, we continue to see significant demand requirements from other countries in the regions as well as from the contractors supporting projects already ongoing in the Kingdom that we expect will more than offset any near-term slowdown that we may experience from a rig count reduction in Saudi Arabia in the Americas.
As mentioned on our last call, demand in Brazil remains strong, led by Petrobras has they still tried to serve our long-term vessel requirements. And with tonnage from other areas of the world slowly being sucked into Brazil, we expect to see further tightening in already take regions. The US Gulf of Mexico had a relatively soft quarter with a limited number of new requirements in Q1 with the majority of our Jones Act fleet already fixed through 2024. We haven't been affected by this dip in demand as some others might have been in the region.
Lastly, in Asia-Pacific, Taiwan and Australia were the key drivers of demand in the region in the current quarter with several new contracts signed up to support drilling activity in Australia that will kick off in Q2 and should go all the way through 2025. Looking further out into 2026, we're also starting to see several of the other NOCs in the broader region, getting organized to increase drilling activity starting end of 2024, all the way out to 2026, which bodes well for the region going forward.
Overall, we're very pleased with how the markets continue to move in the right direction in Q1, and we fully expect that positive momentum to continue through the year and into 2025.
And with that, I'll hand over to Sam. Thank you.

Samuel Rubio

Thank you, Pierce, and good morning, everyone. This time I'd like to take you through our financial results. My discussion will focus primarily on quarter to quarter results of the first quarter of 2024 compared to the fourth quarter of 2023. As noted in our press release filed yesterday, reported net income of $47 million for the quarter or $0.89 per share. In the first quarter of 2024, we generated revenue of $321.2 million compared to $302.7 million in the fourth quarter of 2023, an increase of 6.1%. Active utilization was essentially unchanged at 82.3% in the current quarter and 82.4% from Q4.
Average day rates increased by 8.3% from 18,066 per day in the fourth quarter to 19,005 63 per day in the first quarter, which was the main driver for the increase in revenue. Our gross margin percentage for Q1 increased to 47.5% from 47.2% in Q4. Gross margin in Q1 was $152.5 million compared to $142.8 million in Q4. Adjusted EBITDA was $139 million in Q1 compared to $131.3 million in Q4. The positive result as the first quarter is traditionally the weakest quarter in our fiscal year due mainly to the seasonal weakness. Seasonality is still there, but the increased average day rate more than offset its effect.
Vessel operating costs for the quarter were $167.6 million compared to a high of $58.6 million in Q4. The increase was primarily due to higher crew costs as we transferred several vessels into our Australia region, which has higher operating cost environment. In addition, we incurred higher dry-dock amortization days that increased fuel consumption, and we also incurred higher than normal crew training costs in the period. The increase in operating costs increase our vessel operating costs per market a day to 8,480 in the first quarter compared to 7,008 94 per day in the fourth quarter.
As we look to the remainder of the year based on our most recent forecast. And as mentioned previously, we continue to estimate total 2024 revenues to be in the range of $1.4 billion to $1.45 billion and gross margins to be 52%. In the quarter, we sold three vessels from our active fleet for net proceeds of $4.5 million and reported a net gain of $11 million on the sale of these vessels, we generated operating income of $81.9 million for the first quarter compared to $63.1 million in Q4, an increase due primarily to higher revenue and gains on vessel sales, partially offset by increased operating costs.
G&a costs for the first quarter was $25.3 million, $600,000 higher than Q4 due primarily to higher personnel costs for the year. We still see we still expect our G&A costs to be about $104 million, which includes approximately $13.6 million from non-cash stock compensation. In the first quarter, we incurred $40 million in deferred drydock costs compared to $24.1 million in Q4. This is going to be a heavy drydock year with the first half of the year being the heaviest in the quarter we incurred 1,101 drydock days, 68 days more than in Q4, and this affected utilization by 6%. Drydock cost for full year 2024 is expected to be 129 million in Q1.
We also incurred $10.9 million in capital expenditures related to vessel modifications, ballast water treatment installations, IT. and DP. system upgrades. For the full year 2024, we expect to incur approximately $25 million in capital expenditures. We generated $69.4 million of free cash flow this quarter, which is $8.4 million more than Q4. Free cash flow was primarily attributable to cash generated from operating activities of $10.9 million in capital expenditures, which was more than offset by our $12.5 million investment sales proceeds. Working capital increased during the first quarter as receivables increased because of the higher revenue working capital will grow as revenue continues to grow throughout the year, but we will manage this investment as tightly as possible.
Cash taxes paid for the quarter were $15.6 million compared to $7.3 million in the prior quarter. Increases due to the increase in activity, but also final tax payments were made for prior-year tax returns filed in Q1, we spent $3.5 million to repurchase shares under our announced share buyback authorization. And subsequent to the end of the first quarter, we purchased an additional 12.55 million shares on the open market. We spent $28.5 million in cash pay taxes on behalf of employees in lieu of issuing shares of stock relating to the vesting stock compensation. Year to date, we have used $44.5 million of cash to reduce the number of shares in the market, and that has reduced that count by approximately 492,000 shares. We expect our cash flow performance to continue to improve as the business continues to accelerate.
I would now like to focus on the performance of the regions.
Our Americas region reported operating income of $10.1 million for the quarter compared to operating income of $16.2 million for Q4. The region reported revenue of $64 million in Q1 compared to $68.4 million in Q4. The region operated at 35 vessels in the quarter, which was two fewer than Q4 due to vessel transfers to other regions. Active utilization for the quarter was 76.5%, 4.5 percentage points lower than Q4 due to an increase in drydock activities day rates increased 5.6% to $25,894 per day from $24,524 per day in Q4. The decrease in operating income was due primarily to the lower revenue, driven by two fewer vessels operate in the region, slightly higher operating costs due to unplanned repairs and to the decrease in utilization resulting from the higher number of drydocks for the first quarter.
The Asia Pacific region reported an operating profit of $14.8 million compared to an operating profit of $11.3 million in Q4. The region reported revenue of $47.8 million in the first quarter compared to $38.6 million in the prior quarter. Utilization slipped slightly from 86.6% in Q4 to 84% in Q1, due mainly to the higher dry-dock activity and higher mobilization days as we moved a couple of vessels into the area. The region operated 21 active vessels, which was up two vessels on average compared to Q4 average day rates significantly increased by 18.6% from 25,003 78 per day in Q4 to 30,001 per day in Q1. Higher operating income was due to the increase in revenue, partially offset by the increase in operating costs due to the two vessels added to the region.
For the first quarter, the Middle East region reported an operating profit of $1.5 million compared to an operating profit of $2.1 million in Q4. The region remained steady quarter-over-quarter and reported revenue of $37.9 million in the first quarter compared to $38.1 million in the prior quarter. Region operated at 43 vessels, two fewer than Q4. Active utilization increased slightly from 85.6% in Q4 to 86.6% in Q1. Day rates decreased $11,108 per day in Q1 compared to $10,855 per day in Q4. The increase in day rates and utilization helped maintain revenue close to the prior level prior quarter level. However, operating income decreased due primarily to the increase in R&M costs due to unplanned repairs and higher than normal crew training costs.
Our Europe and Mediterranean region reported operating profit of $14.8 million in Q1 compared to operating income of $13.8 million in Q4. Typically in Q1, we see a drop in activity in the area. However, we saw an increase in day rates from $19,061 per day in Q4 to $19,763 per day in Q1 utilization that decreased by approximately two percentage points to 87.1% from mix from 89 in Q4 due to higher drydocks and unplanned maintenance days. Despite the decrease in utilization, day rates helped outpaces the typical seasonality. As we saw, revenue decreased by only $300,000 to $80.4 million compared to $80.7 million in Q4. The region operated 51 vessels in the quarter, the same as Q4. The increase in operating profit for the quarter was mainly driven by lower depreciation, operating costs as revenue and operating costs essentially remained flat.
Our West Africa region reported operating profit of $41 million in Q1 compared to operating profit of $27.4 million in Q4. The market in this carrier remains very strong. Revenue for Q1 increased by 18.8% to $88.7 million compared to $74.6 million in Q4. The region operate at 67 vessels on average in Q1, same as Q4. Active utilization increased to 78.3% in Q1 from 74.8% in Q4. The region incurred 214 fewer drydock days and 43 fewer mobilization days in the quarter, which contributed to the increase in utilization day rates continue to increase. Impressively as we saw a 14.3% increase to 18,006 87 per day. In Q1 from 61,003 56 per day in Q4. The increase in operating income from Q4 resulted primarily from the higher revenue, coupled with lower operating costs due to the lower number of drydocks in the quarter.
In summary, we are pleased with our Q1 results. Q1 results are normally lower due to seasonality, but the increase in dayrates and solid utilization through this period has more than offset the effects of this typical seasonality. We remain encouraged by the leading indicators we observe in the quarter and will remain focused on free cash flow generation and profitability.
With that, I'll turn it back over to Quintin.

Quintin Kneen

All right. Well, thank you, Sam. And Dee, let's go ahead and open it up for questions.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. If you have dialed in and if you'd like to ask a question, please press star one on your telephone keypad. To raise your hand and join the queue. If you would like to withdraw your question, simply press star one again, if you have called upon to ask question or listening via loudspeaker and your device, please pick up your handset and ensure that your phone is up. And yet when asking your question, we do request for today's session that you please limit to one question and one follow-up again, press star one to join the queue. And your first question comes from the line of Jim Rollyson from Raymond James. Please ask your question.

Jim Rollyson

Good morning, gents. Some impressive results given the normal seasonal factors you've highlighted and Quinn, on the when you look at your leading edge contract rates, obviously they keep moving up last two quarters, kind of the rate of improvement had slowed, which I guess seasonally is probably pretty typical. But the way things are kind of setting up to pickup over the balance of the year, especially during the busy season. I'm curious your view on how we should think about the kind of rate of change of leading edge rates, given what activities doing just the seasonality impact, et cetera?

Quintin Kneen

Hey, Jim, thanks. You experienced it is somewhat muted as we go through Q4 and Q1 because those are just the weakest periods of the year. Globally. And so it doesn't surprise me that the rate of acceleration has leveled off a little bit as we went through the last two quarters. It's always hard to know it but in general, and we saw this last year before, I anticipate that we'll see a ramp up in Q2 and Q3. Certainly there probably is a limit to what that number goes to over time.
It's certainly grown substantially over the past eight to 10 quarters, but I would look for more meaningful increases as we go through Q2 and Q3. And what we've been seeing at this pace last couple of years is it started out about $3,000 a year improvement in overall day rates than the movement up to for now is kind of on pace for five, right? So it has been accelerating about a $1,000 a year on average over the last two, three years. And it wouldn't surprise me to see that in 24 and into 25 as well.

Jim Rollyson

Got it. That's helpful. And as a follow-up, Piers, you kind of went through what's going on geographically and we obviously hear similar things in some of the different regions. I'm curious, as you look out over the next two or three years, where do you anticipate the biggest growth regions to come from at this point, I think come it's not much different from what we sort of say.

Piers Middleton

I think all the areas are looking very positive. Um, I think Asia Pacific looks some like it will be strong going forward. We tend to see the NOCs in that region have been a little bit slower to pick up, but they're starting to talk about that. So I think that's one area. Obviously, Brazil has continued to be or some has been strong and Petrobras continues to I'm putting out, Tom, but that number is looking at 2030. So that looks like it will continue to be a strong area as well. I think it's all positive. So those are the sort of two standout areas and Africa continues to look very positive as well than Southern Africa in particular as well. There's a lot of work going on down there as well. So there's no bad spots at the moment is how I would leave it briefly here.

Jim Rollyson

Appreciate the color. Thanks.

Operator

Our next question comes from the line of Fredrik Stene from Clarksons Securities.

Fredrik Stene

Well, I want to touch upon two a theme starting with capital allocation and the capital structure. You've talked about getting a more streamlined debt structure and in my head that would typically entail that you're grouping all your current facilities together maybe for a larger, more long-dated bond. Is that something that has changed or that you're your own thinking around how an ultimate cap structure would look like has changed?

Quintin Kneen

Thanks for the question. Good to hear from you. I'm going to kick it over to West as you've been doing a lot of strategy thinking for us from a book from a capital structure perspective. But one of the things that we're certainly focused on is creating a debt capital structure that's consistent with the needs of our business. So so I just wanted to update them on the current thinking on.

West Gotcher

Yes, sure. Hey, Frederic, good morning or good afternoon to you. I appreciate the question. So I guess the way we're thinking about it today is, you know, certainly the cap that capital structure today is, you know, has been kind of piece together here over the past two years through refinancings and the acquisition and what we'd like to get to is a more appropriate debt capital structure for the cyclical business that we're in. So we're in a position today where we feel we have the flexibility to be opportunistic in evaluating ways to shape the capital structure going forward on based on what we can observe in the market, the debt capital markets, both here in the U.S. as well as in your home market appear to be relatively constructive on.
We aren't facing any near-term maturities or anything of that nature. So we want to be thoughtful and judicious about how we approach that. But we do believe that we are approaching that time where it makes sense to give some real thought to it sort of the ultimate shape and complexion of that capital structure of our debt capital structure I still think remains to be seen, but it is an environment which we feel is supportive to our efforts to begin to evaluate that.

Fredrik Stene

And that's that's very helpful color. And on the back of that, I think you alluded to in your prepared remarks, and one of the ultimate goals here is to have more flexibility around how you spend the cash that you are generating and is going to generate at least on my numbers, but I see that you didn't during Q1 fully utilize the share repurchase agreement you accelerated a bit now in the second quarter, but I was wondering if you will, I think now that the share price has actually approached $100 per share. That's one of the regions where you would think that you would switch to As to dividends, for example, instead of doing share buybacks. So is how you have done any thinking around and how you would allocate capital between dividends and share repurchases under the baskets that you're allowed to use currently?

Quintin Kneen

Yes, I don't want to give anybody any indications of what we think our intrinsic value is, but it's certainly higher than where we're currently trading today. And obviously, we're very optimistic about the outlook is based on just the EBITDA growth and the cash flow generation of the business. But you're right, yes, there's a there's a point when the value that you see from repurchasing shares is limited.
But I also see the potential for acquisitions. So you are right now and more focused on repurchases because those have been more value than acquisitions. However, acquisitions may become more attractive as we go through the next several quarters, and we'll maintain a focus on all of those things. So I would say if I had my druthers, I would still focus on value added acquisitions, but there's going to be so much cash coming off of this business in the next couple of years that share repurchases, acquisitions and dividends will all play a role.

Fredrik Stene

Super. And final one quick one for me. First quarter was very good. And I think out of everybody's expectations, which means that the step-up in kind of the second quarter is going to be a bit less maybe than what you previously anticipated. But on the back of this strong first quarter performance, do you think there's a chance that you could go or go above and beyond your guidance or that will now appear that it leads to the high end of that guidance?

West Gotcher

Hey, Frederic. It's West again. But there are certainly variables within the year as you are particularly aware of in the North Sea with anchor handlers and so forth. But what we spend a lot of time on our internal forecasting, I think we've recounted that in prior calls and kind of the robust approach bottoms up approach that we take to that. So this juncture, what we communicated on today's call is what we feel comfortable with. I'm committing to an articulating to the market.

Fredrik Stene

That's absolutely fair. Thank you for probably for taking my questions and have a good day and thanks for taking.

Operator

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

David Smith

Hey, good morning and thank you for taking my question. Sort of a marketed. Sorry if I missed the details in the prepared remarks, but wanted to make sure I heard though, the guidance correctly for relatively flat vessel margin, minimal vessel margin improvement in the second quarter, but then a 700 basis points step-up to margin in the third quarter? And if I did hear that correctly, is that largely due to the timing of contract rollovers? Is it more downtime and costs that disproportionately impact our Q2 versus Q3. Just any color behind that? Is that ramping up second third quarter, please?

West Gotcher

Yes. So Hey, Dave, it's West. Good morning. Appreciate the question. Yes, to answer your question directly, that is how we characterize the margin progression from a Q2 and Q3 perspective. There are a variety of items that I guess impact that certainly the rolling of contracts is definitely impactful. We did talk about some drydocks coming forward into Q2, which, you know, we tried to do as early in the year as we can to prepare for the busier seasons of a couple of vessels, they're mobilizing and a little bit of unplanned maintenance. So I think a combination of some of those items alleviating the continued rolling of contracts as you get into Q three, when you look at those combined, that has a pretty material impact on from a from a margin perspective.

David Smith

Got it. Got it. Thank you very much.

Operator

Our next question comes from the line of Josh Jayne from Daniel Energy. Please go ahead.

Josh Jayne

Thanks. And maybe first Steve, you talked about the Gulf being sort of a little bit soft in Q1, not necessarily Tidewater specific, but just from the conference calls of the drillers so far, it seems over the next 18 to 24 months, Gulf of Mexico should be a pocket of strength just with respect to rig activity and going forward, would you agree with that also and how you're thinking that, how are you thinking about that market over the next 18 to 24 months?

Piers Middleton

Yes. I think that's probably if the drillers are saying it that probably right. And we're certainly seeing I think that was that a slowdown in Q1, which we'll probably see walking through into Q2 as well a little bit, I think as an organization face with some of the drillers that we're seeing to get the rigs in the right place. So I'm certainly not negative about the Gulf.
Sometimes you see this in certain regions, you'll get a sort of slight slowdown as people reposition rigs into areas from, say, unaware, we're positive going forward. I think it's just a maybe a couple of quarters where it slowed down a little bit, and there's not been quite as much activity as perhaps people had expected. I mean, it's not, as we said, affecting us so much as we sort of saw that coming a little bit. So we fixed a little bit longer in this area than we have done normally. But some we don't expect the Gulf to be slowing down long-term. That's a smaller, a short term issue.

Josh Jayne

And then the other thing you mentioned on the short term chartering strategy, I would assume that's not a broad brush when you talk about it at nine month terms and things of that nature across the entire fleet. Could you talk about if there are opportunities within certain ranges for longer term contracts and how those conversations are ultimately going with your customers, how you view those, et cetera?

Piers Middleton

I mean, our customers are still coming out long-term tenders, and we're not precluding that and I think we've said before, we are part of that short term strategy is not only about driving rates, but it's also driving contract terms, which we feel are incredibly important and getting our customers to and make more export contracts. But now we're definitely seeing in certain regions, our customers wanting longer-term durations. We're just choosing to go a little bit shorter term because we still feel there's a lot of runway in this market globally, and we want to keep our optionality on our side of the fence rather than in our customer side of the fence, which you and doing a lower market.

Josh Jayne

Great. Thank you.

West Gotcher

Thanks, Josh.

Operator

Our next question comes from the line of Sherif Elmaghrabi from BTIG. please.

Sherif Elmaghrabi

So I apologize if my questions have been asked. Industrial, you called up the cure dried up due to the 60% drag on utilization. As we think about the key drivers there. And then just as far as your line was a bit drug, there is about a dock question. Is that correct? And the cadence for the rest of the year and how that affects utilization?

Samuel Rubio

Yes. So utilization for the rest of the year, I think we mentioned on the call that we're going to be pretty heavy the first half of the year and then and then it will drop off the second half of the year. So so you'll see instead of the normal 6% that will go down to 4%, hopefully in the depending on the timing of some of these drydocks right to 4% overall utilization.

Sherif Elmaghrabi

And then again, a little bit more esoteric here. Is there an effect on the supply both from emissions regulations for full Europe? Europe's rolled out a role, the maritime trade? You mentioned trading scheme. And I'm wondering if that's a consideration when you're looking for new work for costs associated with emissions can be a little extra juice to raise in the North Sea, for example, or if operators are getting and we're anxious about securing tonage dominant.

Piers Middleton

It's primarily a European tissue going into 25 and beyond and is for them vessels over a certain tonnage size over 5,000 tons for most of our vessels don't come hit that size. So it doesn't affect us. But I would say if it doesn't as esoteric, I mean, I think generally our customer base wants to have the most fuel efficient vessels, and I'm looking all the time at how they can cut emissions. That's why we have obviously, 16 hybrid vessels in the fleet more than anybody else has. So we're obviously looking at it as well as a business on a global basis. But no, we're not seeing a pushback from we're not expecting to see anything material from a government perspective globally.

Sherif Elmaghrabi

Okay. Thanks for taking my questions.

Operator

Our next question comes from the line of Don Crist from Johnson Rice. Please go ahead.

Don Crist

Morning, gentlemen. I just wanted to ask about the pace of new FPSOs coming out and what's your kind of balances today between drilling rigs and kind of production vessels and how that could skew demand as we kind of move forward throughout the year.

Piers Middleton

And yes, I mean, with them, as you probably heard, we're positive on the amount of FPSOs coming out from. I think some as we look forward and I may get the numbers wrong here, but I think rice does come out with some numbers of expecting 40 plus 48 of FPSOs coming out in the next five plus years, which is obviously positive in terms of how our current fleet is. I mean, normally, we so I think we say we're around 60/40, 60% production and 40% drilling type work. I'd say that's a little bit more skewed towards supporting drilling at the moment from our side. I mean, we've obviously got some subsea construction in there as well. But I don't know maybe Quintant have some added color on that as well.

Quintin Kneen

It certainly varies over the time and we don't always have a clean break between the two because when someone struggling a vessel that are not always just focused on drilling, there could be some production support elements in it over to Oak Ridge contract life, but it will vary throughout the cycle into moving into the higher allocation towards drilling right now. So than peers was indicating a 60/40, so 60% production 40% other, which is generally drilling rigs, FPSOs, offshore construction, other elements like that. And a year ago that was probably 70 30 that in the depths of the pandemic was probably 80 20. So it definitely weights higher at this point in the cycle and wouldn't surprise me if it stays at that level, it doesn't normally go over 60 40. So logically, we should be at about the maximum level of allocation of those.

Don Crist

And just from a market demand standpoint, FPSOs, generally speaking, require about the same type of vessel was the bigger offshore driller very dry?

Piers Middleton

Yes, it depends on the regions, but yes, generally minute you're looking at some PSVs and some funding way are some anchor handlers to support the FPSOs as well.

Don Crist

I appreciate the color. Thanks. I'll turn it back.

Quintin Kneen

Thanks, Don.

Operator

Thanks. And no more questions. I will now turn the conference back over to Quintin Kneen for closing remarks.

Quintin Kneen

Thank you, Dee, and thank you, everyone, for participating in the call today. We look forward to updating you again in August. Goodbye.

Operator

Ladies and gentlemen, that concludes today's call, and thank you all for joining, and you may now disconnect.