Tidewater Inc. (TDW) Q2 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Tidewater Reports Results for the 3 Months Ending 6/30/21. My name is Brandon, and I'll be your operator for today. [Operator Instructions] Please note this conference is being recorded. And I will now turn it over to Mr. West Gotcher, Vice President of Finance and Investor Relations. You may begin, sir.

Thank you, Brandon. Good morning, everyone, and welcome to Tidewater's earnings conference call for the 3 months ended June 30, 2021. I'm joined on the call this morning by our President and CEO, Quintin Kneen; our Chief Financial Officer, Sam Rubio; our General Counsel and Corporate Secretary, Daniel Hudson; and our Vice President of Sales and Marketing, Piers Middleton. During today's call, we'll make certain statements that are forward-looking, referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we make during today's conference call. Please refer to our most recent Form 10-Q for additional details on these factors. This document is 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 10, 2021, 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 measures is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Thank you, West. Good morning, everyone, and welcome to the Second Quarter 2021 Tidewater Earnings Conference Call. Joining me in presenting our prepared remarks, as usual, are Piers Middleton and Sam Rubio. I will open the call with some general commentary on the quarter. Piers will cover the markets in the various geographies in which we operate and then Sam will wrap up the prepared remarks with an overview of the income statement, OpEx, G&A and the balance sheet. And then, of course, we'll open it up for questions. The second quarter is on a seasonal basis, a relatively strong quarter, with the third quarter being the strongest in the year. This year's second quarter followed that pattern. Piers and Sam will provide the details, but globally, average day rate was up, utilization was up, gross margin was up, operating profit was up, the increases are never as swift as we would prefer, but the sequential quarter improvement is a good sign that activities are past the pandemic low. Industry-wide, what we saw in 2020 were activity levels coming down dramatically in the third quarter with a substantial number of vessels going off higher. As a result of this incremental oversupply, day rates around the world reset downward and as pre-pandemic contracts rolled off, new contracts rolled on with lower day rates in the first quarter. Now as activity levels are picking up again, we are beginning to claw back the day rate that we lost in 2020. Cash flow for the quarter was again strong. You may recall that accounts receivable bounced up in the fourth quarter of 2020 just as activity levels were coming down, which is not typical. That was due to payment delays from Pemex, which as of June 30, are trending towards normal levels. In the second quarter, we had strong cash flows from that normalization. We also picked up $18.6 million in vessel and other asset proceeds sales as we continued to high-grade the fleet. Feel free to pick the metric that best suits your perspective, be it cash flow from operations, free cash flow, free cash flow before vessel disposals, it's all there in the press release. They're all positive, and we have designed the business architecture incentives to keep it that way. Net debt is down to $4.5 million. We do have the maturity of the 2022 bonds in August of next year. The principal outstanding on the bonds is $135 million, and we're currently sitting on $151 million of cash. Currently, the prepayment penalty on the bonds is $10 million. So we're going to be mindful of that as we evaluate refinancing opportunities over the next several months. The prepayment penalty goes down approximately $825,000 per month. Free cash flow for the trailing 12 months was $84 million, down from the $87.1 million as of last quarter. The slight decline reflects the decrease in activity as the full impact of the pandemic is now in the trailing 12-month figures, offset by a liquidation of working capital related to a decrease in activity. Quarterly revenue rounds out to $90 million. Operating costs were slightly higher than we were anticipating largely due to direct costs related to the pandemic and vessels reactivated during the quarter. And as a result, margins were 1 percentage point below where we thought they would be for the second quarter, but they still reflected a pickup of more than 3 percentage points during the quarter. We came in at 29% this quarter, but we're still anticipating margins of 30% for the full year. My expectation is that the third and fourth quarters will average just above 30%, but that anticipates a reduction in direct pandemic costs that have proven to be more stubborn than we envisioned at the beginning of the year. We used the cash generated in the quarter to pay off another $11.4 million of outstanding debt, combined with the build in cash, net debt is down another $21.1 million to $4.5 million. We spoke a bit on the last quarter call about this business' significant degree of operating leverage. Once the boats are operating, incremental day rate margins and revenue from incremental days work should drop 100% to operating profit. This quarter's incremental operating profit was 95%. Operating leverage has cut against us in the past 6 years and particularly the last year as we dealt with the pandemic, but incremental margins this year were a positive 95%. It goes up on the same scale as it's gone down. We've spent an enormous amount of effort to signing a culture and a business model that will be cash flow positive in the worst of times and significantly cash flow positive in the best of times. And I look forward to continuing to deliver these positive incremental margins on an increasing revenue base as we proceed through the recovery. We disposed off 7 vessels and some other assets in the second quarter for $18.6 million, and we have 14 vessels left in the asset held for sale category. We did sell one 260-foot U.S. flag vessel that had been in layup and was facing an approximately $3 million reactivation but which was not classified in the asset held for sale category, I would classify that sale as an opportunistic one. We sold that vessel for a $4 million book gain. At any point in time, we're willing to sell any vessel if the present value is in excess of our bull market recovery scenario, which was the case in the sale. Based on the recovery in the market that we see beginning to unfold in the second half of 2021, we don't anticipate reducing the vessel fleet any further than what we currently have in asset held for sale. After this lot is sold, we still anticipate everything we own being gainfully employed by the end of 2022. I am very much looking forward to getting out of managing a fleet of layup vessels, in addition to the active fleet vessels and layup, give us the ability to take advantage of improving market conditions. It's an investment in those vessels that do not merit reactivation at this time. But based on our internal forecast of the recovery, they should be reactivated in due course and ultimately more than justify this investment. Those vessels that don't meet this criteria are classified as assets held for sale. As our perception of the recovery and the cost of reactivation change, vessels will move in and out of the asset held for sale category. During the second quarter, we moved 1 vessel out of the asset held for sale category into the active category. Vessels in layup cost us $3.8 million in the second quarter, which is down 30% from the first quarter cost, but it's still an annualized cost of $15 million per year. Removing this burden by gainfully employing or disposing of these assets will add that $15 million to cash flow in addition to the operating profit from those vessels that go back to work. As part of this ongoing work to high grade the fleet, we are also focused on enhancing the connectivity and data capture analysis capabilities of our active vessels, providing our operations team with valuable insight that allows us to operate more efficiently, reducing fuel usage and our Scope 1 emissions. We have demonstrated that shore power systems have also been very effective at reducing emissions while in port. So we are installing several more on vessels, operating in ports that offer the necessary infrastructure to support this technology. This operational data and these positive results are enabling closer collaboration with our customers as we work to identify the most effective methods for reducing our joint carbon footprint. This data also provides customers with the justification to increase day rates to support those continued investments. Our G&A costs went up for the first time in 10 quarters. Our annualized G&A expense for the second quarter was $67 million. We mentioned on the last quarter call that G&A would begin to rise a bit as we go through the remainder of 2021 as we have begun to fill some open positions, and we anticipate travel expenses coming back as we get further along into the pandemic recovery. Our big cost focus in 2021 is optimizing the cost of drydocks and minimizing the cost of vessels in layup. As I mentioned earlier, we reduced the annual run rate of vessels in layup by 30% during the second quarter from $21 million down to $15 million. It's a combination of reactivating vessels, disposing the vessels and reducing the cost per day of the vessels in layup. The cost per day of vessel in layup went down 16% and the reduction in the number of vessels in the layup fleet, makes up the remainder to get to the overall dollar reduction of 30%. We now anticipate drydock costs for 2021 to be approximately $24 million as we are planning to reactivate more vessels than we originally thought we would at the beginning of the year. This is a good development, but it brings with it additional cost. In addition, the second quarter drydock costs came in at approximately $4 million, which was less than the $9 million we were anticipating to spend. The drydock savings in the second quarter isn't a cost efficiency. It's just a cost that has been delayed into the third quarter. So the third quarter will now be our heavy drydock quarter for the year as we reactivate more vessels than we originally budgeted and performed more -- performed drydocks that were originally slated for the second quarter. We're now anticipating approximately $13 million of drydock costs in the third quarter. Global utilization and day rates are increasing, reactivations are also increasing. The active vessel count prior to the 2020 pandemic, the best quarterly record we had since the 2014 oil price collapse was the second quarter of 2019. In that quarter, we had revenue of $124 million from 163 working vessels with an active utilization of 79% and an average day rate of $10,442. This year's second quarter, we had 118 vessels working average utilization of 78% and an average day rate of $10,435. We're definitely off the pandemic lows. But to get back to the highest revenue we had prior to the pandemic, we need to put all the remaining vessels back to work and push day rates up another $1,200 per day, which I feel confident will happen as we go through the next 18 months. When we get there, the high grading of the fleet that we have been doing over the past 30 months should demonstrate the revenue and earnings generation capability of the fleet. Similar revenue with 10% fewer vessels results in a higher overall profitability. I continue to anticipate it will be the first quarter of 2022 before we get back to where we were at from a supply and demand perspective when the pandemic hit and then a year to push day rates and market share. If the market continues at its current pace of recovery, we should see quarterly revenue number by the end of 2022 comparable with that previous record quarter in 2019. Pandemic-driven inefficiencies, which we estimate cost us 5% of revenue are still impacting us. This is factored into our full year margin guidance of 30%. Each wave of the pandemic has created different challenges, although they can all be generalized as increased costs associated with safely moving people around the world. The latest challenge is the Delta variant and its impact on the Middle East. Last quarter, it was mariners from India. We continue to respond to the circumstances presented, but that 5% of revenue cost still looks like it -- to be with us for the remainder of 2021. That's a quick overview of the quarter. I will now hand the call over to Piers for an update on the vessel market and the various geographies in which we operate.

Thank you, Quintin, and good morning, everyone. While the supply-demand balance globally remains challenging, primarily due to the overhang of potential vessel supply, we are starting to see some green shoots of recovery in the majority of the regions in which we operate. We continue to see both increased levels of tendering and inquiry from our clients, particularly for our larger PSV fleet, which appears to bode well going into next year. As we move into the second half of the year into 2022, the primary factor for the industry to achieve a long-term and sustainable recovery is discipline, not just from Tidewater, but also from all the stakeholders in our industry. The industry is at an inflection point that will require discipline from a vessel reactivation, commercial and operational perspective to support an economically viable market environment. Tidewater recognizes its place in leading the industry to judiciously reactivate vessels in response to economically attractive opportunities incremental to the current supply-demand balance. Discipline, anchored and responding to improving market fundamentals will allow us to continue to maintain our working fleet and to continue to maintain and take care of our dedicated team of mariners that has enjoyed many challenges throughout the pandemic. We believe that a disciplined approach to responding to market signals will ultimately lead to a long-term and sustainable recovery for the whole industry. Sam will talk in greater detail on some of the numbers. But as we look at the second quarter of 2021 compared to the same period last year, we do believe we continue to see positive trends pointing towards a recovery in rate and utilization levels, although not perhaps as quickly as we would all like. On a global basis, active utilization across the whole fleet was up 4% to 78% compared to the second quarter of 2020, and the average stacked fleet down from 64 ships in Q2 2020 and to 44 ships in Q2 2021. Average rates while slightly down from $10,799 per day in Q2 2020 was still an impressive $10,435 per day in Q2 2021, which was also a $500 per day increase from last quarter. Globally, we had 118 active vessels working in the second quarter of 2021 with a total fleet of 162 ships against 202 vessels in Q2 2020, reflecting our aggressive policy over the last year to rightsize the fleet to be best in class for the market going forward. Our Middle East, Asia Pacific region continued to deliver consistent results in Q2 2021 with active utilization for the quarter, jumping 13% from 76% in Q2 2020 to 89% in Q2 2021. Our average rates in the region also increased to $8,593 per day compared to $8,009 per day in Q2 2020. Going forward, we still expect to see a continued pickup in demand going into Q3 and Q4 of this year as we start to see a number of new tenders being released from some of our long-term and established clients in the region. To West Africa, where average day rates for the region were $8,521 per day, a decrease of $200 per day from the previous quarter. But active utilization did increase 7% from last year's quarter from 55% to 62%. West Africa continues to struggle with day rates, but we are beginning to see more positive utilization levels, which in turn, should allow us to start pushing charter rate levels as we move into next year. In the Europe and Mediterranean region, Q2 2021 saw an improvement in average rates compared to Q2 2020 from $12,689 per day to $13,005 per day and active utilization creep up above 90% from 89% for the same period last year. We also decreased the stacked fleet from 17 ships in Q2 2020 to 8 ships in Q2 2021. As mentioned on the last call, we continue to see solid improvements in the region, both in the North Sea and the Med as activity improves. And in addition, by year-end, we will have added another hybrid battery powered vessel to our fleet in the Mediterranean as we continue to offer our customers around the world, different power and engine options to support all of our commitments towards a lower carbon future. Lastly, in the Americas region, active utilization was down 12% compared to Q2 2020 but average day rates for the quarter were up slightly from $12,865 per day in Q2 2020 to $13,162 per day in Q2 2021. The stacked fleet, however, was reduced from 17 vessels in Q2 2020 to 13 ships in Q2 2021. The region still faces challenges in 2021 but we have started to see a significant tightening in the Jones Act market for larger boats and expect that tightening to help improve utilization and charter rates as we move towards the end of the year and into the first half of 2022. Thank you, and over to Sam.

Thank you, Piers, and good morning, everyone. I would like to take you through our financial results and also discuss some key points that make up these results. My discussion will focus primarily on the quarter-to-quarter results over the second quarter of 2021 compared to the first quarter of 2021. As noted on our press release filed yesterday, we reported a net loss for the quarter of $29.5 million or $0.72 per share. Our revenue for the quarter of 2021 was $90 million, this is $6.4 million or 8% more than in the first quarter of 2021. Active utilization at 78% was slightly higher than the previous quarter. Average day rates also increased 4% from Q1 to $10,435 per day. In addition, our active vessel count for the quarter increased by 2 to 118. Gross margin percentage for Q2 also increased to 29% compared to 26% in Q1. We continue to feel the ongoing impacts of the COVID-19 pandemic in each of our operating areas, however, the increase in overall commercial activity is a positive sign to what we feel will be an active second half of the year. Vessel operating cost for the quarter was $64 million, an increase of $3.2 million from Q1. The increase is due mainly to higher mariner salary and travel costs and higher supplies and consumables resulting from the reactivation of 7 vessels in the quarter. In addition, we also incurred over $600,000 of mariner severance costs related to our Brazil area as we continue to wind down our activity in Brazil, several vessels came off higher and did not return to service. In the second quarter of 2021, we recorded a $1 million credit to our net due from affiliates accounts receivable balance. This is related to our Angola joint venture as part of the current expected credit loss devaluation. In addition in Q2 2021, no vessel impairment charges were recorded. We sold 7 vessels and other assets in the second quarter for proceeds of $18.6 million and recorded a net loss of $932,000 on these sales. For the year, we have sold 13 vessels and other assets for proceeds of $29.6 million and reported a net loss of $2.9 million on the sale of these assets. Our operating loss of $20.2 million improved by $6.1 million from Q1 due mainly to the increase in revenue, the affiliate credit loss and the decrease in loss on sale of assets. This is offset somewhat by the increase in operating expenses as we realize the effect of reactivation on our vessels and ongoing COVID-related expenses. G&A costs for the quarter was $16.8 million, an increase of $700,000 from Q1 due to higher professional fees, higher salaries and benefits as we fill some corporate positions that were vacant in previous quarters. G&A cost control continues to be a primary focus. Our annualized G&A expense for the first quarter was $64 million, this has increased to $67 million in Q2. On our prior call, we targeted 2021 G&A costs to be $68 million, which is still our target. In the quarter, we had $4 million of deferred drydock costs compared to $2.7 million in Q1. Q2 was supposed to be a heavy drydock quarter, however, some projects slipped into Q3, which we now anticipate will be the heaviest drydock quarter for the year. We anticipate Q3 drydock costs to be $13 million and full year 2021 cost to be $24 million. The full year estimate has increased by $4 million from our previous estimate due mainly to the accelerated reactivations of vessels in our West Africa, Europe and Mediterranean regions. In the quarter, we also incurred $700,000 in capital expenditures. We anticipate the full year 2021 spend to be $7 million. Free cash flow continues to be a key focus for us and once again, we achieved free cash flow of $26 million in the second quarter, continuing a positive trend of achievement. The strong free cash flow was achieved primarily by generating $4.9 million in cash from operating activities and asset sales proceeds of $18.6 million. Since the beginning of the pandemic, starting April 1, 2020, we have generated over $113 million of free cash flow. On previous calls, we talked about collection challenges related to a good customer of ours in Mexico. Our balance with Pemex was approximately $26 million at the end of 2020. We are pleased to report that their payment patterns have approved in 2021. At the end of Q1, their AR balance was $24 million and has since decreased to $15 million as of June 30. The outstanding balance is still a bit high compared to their normal amount, however, we will continue to pay close attention to these balances and work to collect and reduce them as these collections play a big role in achieving our free cash flow goals. Our dialogue with them continues to remain open and content. And based on that, we remain optimistic that we will get this balance normalized over the next few months. In Q4 of 2019, we began reclassifying vessels on our balance sheet from property and equipment to assets held for sale. And at that time, we reclassified 46 vessels. In 2020, we added another 30 vessels to assets held for sale, and we sold 53 leaving a balance of 23 at year-end. During the first quarter of 2021, we sold 3 more vessels plus another 3 from the active fleet for approximately $11 million. In the second quarter, we sold 5 vessels and 2 more from the active fleet for $18.1 million. Also in the second quarter, we reactivated 1 vessel from our assets held from sale back to active -- leaving us with 14 vessels with a book value of $17 million remaining in this category. As mentioned in our previous call, in 2020, we repaid just under $100 million of debt and eliminated EBITDA to interest covenant in our indenture and Troms loan for the remainder of 2021. We continued this effort in the first quarter of '21 by repurchasing another $11.8 million of the bonds in the open market and paying down $14.6 million of our Troms debt. In the second quarter of 2021, we paid down another $11.4 million of our Troms debt, leaving us with a net debt balance of $4.5 million, a decrease of $21.1 million from the end of Q1 '21. We continue to evaluate our options in the bank and debt capital markets with regards to refinancing bond maturity in 2022. Our current balance at June 30 is $135 million, but we already have more cash today than the bond maturity balance, and we fully intend to continue to be free cash flow positive. As such, we are confident in our ability to manage our debt maturities. I now would like to focus on the performance in the regions. Our Americas region reported an operating loss of $4.9 million for the quarter compared to an operating loss of $1.7 million in Q1 '21. The area reported revenue of $23.5 million in Q2 compared to $26.2 million in Q1. The area reported 3 less active vessels in the quarter. Active utilization for the quarter was 76% compared to [ 80% ] in the prior quarter. This was offset somewhat by day rates increasing from $11,865 per day in Q1 to $13,162 per day in Q2. As mentioned previously, the region incurred over $600,000 mariner severance costs, and we continue to wind down the activity in Brazil. Our Middle East, Asia Pacific area reported operating income of $266,000 for the quarter compared to an operating loss of $1.9 million in Q1. The area reported revenue of $25.6 million in Q2 compared to $24.4 million in Q1 and operate at 1 less active vessel. Active utilization did increase to 89% in Q2 compared to 84% in Q1. Day rates increased marginally from $8,506 per day in Q1 to $8,593 per day in Q2. In addition, G&A costs in the area also decreased due to an adjustment made to bad debt expense. Our Europe and Mediterranean region reported an operating loss of $2 million in Q2 compared to a loss of $8 million in Q1. The area generated the largest increase in earnings for the company in the quarter as it reported significant improvement in its results. We saw revenue increase by 52% to $22.5 million in Q2 compared to $14.7 million in Q1. The area operated 4 more active vessels in the quarter and active utilization increased to 91% in Q2 compared to 81% in Q1. And we also saw day rates increase 9% from $11,960 per day in Q1 to $13,005 per day in Q2. Our West Africa region reported an operating loss of $5.4 million in Q2 compared to a loss of $6.8 million in Q1. Revenue for Q2 was $16.9 million compared to $15.6 million in Q1. The area operated 2 more active vessels in Q2. Active utilization increased to 62% in Q2 from 60% in Q1. However, day rates decreased by 2% from $8,711 per day in Q1 to 8,521 per day in Q2. In summary, we did see improvements in each of the regions with the exception of Americas as several vessels came off contracts in the early part of the second quarter and did not return to work, particularly in Brazil and the Caribbean areas. In Brazil, we continue to wind down our operations, which also impacted the region's results. We did see significant improvements in the Europe and Mediterranean region, which was anticipated and positive improvements in West Africa and Middle East and Asia Pacific regions. As mentioned previously, we continue to remain impacted by the current COVID challenges, however, we are encouraged with the positive commercial signs that we are beginning to see in each of our areas, and we believe the activity will continue to strengthen as we progress through the year. With that, I will now turn the call back to Quintin.

Thank you, Sam. Brandon, let's just go ahead and open it up for questions.

[Operator Instructions] And on the line from Evercore ISI, we have Andres Menocal.

So this is more of a high-level question. I appreciate all the color you provided on the call. Many thanks for that. I guess, qualitatively and quantitatively, what are you seeing from your customers in terms of activity levels and conversations that's given you confidence in the outlook for 2022? Just saying that just given that budgets are looking to be solidified towards the back half of the year. So just curious to understand what's informing your view that the end of the year into next year might be a little bit better or significantly better?

Certainly, I'll start off, and then I'll let Piers follow up with some more details. But really, I haven't seen this much tendering activity in about 18 months, tendering activity does not always mean that it's going to end up being new work. Sometimes they're tendering for vessels that are already in the market and trying to reprice, okay? But I would say that the pickup that you saw in the numbers in the second quarter for the North Sea is a good demonstration of the pickup that we're seeing in Africa as we go through the second half of '21 and into '22. The U.S., I'm starting to see a bit more improvement, but it's probably about a quarter behind that in Africa. Piers, why don't you provide some more direct color with some of the contracts that you have.

Yes, of course. I think specifically in Africa, which obviously is -- I think we've spoken very openly about how much it suffered as a region over the last 12 to 18 months. We're seeing a significant pickup in tender inquiries from our customers, which are coming through, as to fairly long-term charter opportunities, not just on current contracts that as being retended, but actually new contracts as well in new areas, which is driving the market. And specifically, as I sort of mentioned on the larger platform supply vessel size as well, we're seeing a lot of activity in the Med Africa from our side. And I think going into the Caribbean, Guyana, Suriname next year as well, we're starting to see a pickup there as well. So overall, there's very positive signs from what our guys are seeing on the ground and the level of activity.

Great. Another question in terms of efficiency gains in your fleet, I know you've put a number of investments and time and after these past couple of years into your systems and infrastructure and on to get the fleet operating at a higher level. What innings do you feel like you're in, in terms of getting to that target statement? And what's in the pipeline for the kind of initiatives you can further implement to continue increasing those efficiency gains that we've seen this past 1.5 years?

That's a good question. So I would -- I'll throw out the sixth inning, and then I'll tell you why I think it's a sixth inning. So the most effort over the past few years has really been in the shore-based infrastructure system. So just making sure that we are as efficient as we can be and as scalable as we can be on a G&A footprint perspective. But we're just beginning to touch the vessels themselves. And on the vessels themselves, it's a little bit different. It's not just the operational efficiency, but it's the fuel efficiency, it's the fidelity and the transparency of data coming from the performance of the vessels that allows us to go back to our customers and say, "hey, you want to reduce Scope 1 emissions. This is the data we're seeing from this type of vessel. This is how you're operating the vessel, this is what you can do to improve upon that so that you can improve your Scope 1 emissions, our scope 1 emissions as well." So as a result, I think that we're probably in the sixth inning, I'd say that the majority of the work on the shore base is done, we're probably 20% into what I think we can do on the vessel side.

Great. In terms of what you're seeing in the asset and divestiture market, it's great to see older vessels getting sold and that net profit -- or sorry, the cash flows helping you guys. Can you describe what you're seeing in the A&D market? And is there any concern that some of the vessels that are being disposed could go back to work in what's historically been deemed in an already oversupplied market?

It's -- the 1 vessel that we opportunistically sold in the second quarter, she was a good vessel, but she was facing a $3 million reactivation. And so we were waiting for market conditions to come around to -- for that boat to be reactivated. And I see reactivation costs for vessels that are in layup, particularly those that didn't work during the pre-pandemic period, post-2014, they haven't working. We've gotten rid of most of those vessels because the reactivation costs on those vessels is approaching $5 million or more per vessel. So the reactivation of vessels is always a threat in this industry. But the costs are getting so high for those vessels that weren't working during the pre-pandemic period that I don't believe a lot of them will get reactivated. But again, we'll see how that plays out. We're definitely focusing our fleet on the more -- on the higher-end vessels. So the larger vessels, more modern vessels, which we believe will come in at a higher day rate overall, be more fuel efficient and less costly going forward.

Understood. Just 2 more questions, if I may, just more pertain to the financials. As we look to the 2022 notes being retired and repaid next year. What is the right amount of capital or cash that you think the business needs in order to operate? And do you feel like you have everything you need in place in order to do that? Is there a chance that you have to tap into capital markets to -- in order to get to that kind of run rate level of cash on the balance sheet?

Well, the frictional amount of cash that we need in order to run the business is about $30 million, okay? So that's the base level we need for working capital and general purposes. What we've been doing with our existing cash balance is just having a backup of liquidity. And so we'll continue to have backup liquidity sources, whether that's going to be in the form of revolving debt capacity or just cash on the balance sheet, it all depends on what the capital markets are open for. Historically, the bonds haven't let us have a revolver with its own collateral. So we've been using cash on the balance sheet as our liquidity source as we retire bonds, and we may refinance into something else or we may go into a revolving debt capacity for liquidity purposes. But absolute question is how much cash do we need to run the business, Sam, about $30 million or so?

That's correct. Right.

And then I'd want a minimum of about $70 million worth of liquidity just in case.

Understood. And then just the last question, if I may, and this just pertains to taxes. How should I think about cash taxes going forward for the company? Is there anything that I should be aware of there?

No. I mean, I would say that they're going to remain relatively flat. I mean we -- currently, our cash tax is about $12 million to $13 million a year, and I don't see that changing.

[Operator Instructions] Okay. Looks like no further questions at the moment. I will now turn it back to Quintin for closing remarks.

Well, thank you, Brandon. Everyone, I appreciate your participation in the call today. We will update you again in November. Goodbye.

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