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Tidewater Inc (NYSE:TDW)
Q3 2019 Earnings Call
Nov 12, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Earnings Conference Call Third Quarter 2019. My name is Sheryl and I will be your operator for today's call. [Operator Instructions] Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference call is being recorded.

I will now turn the call over to Jason Stanley. Sir, you may begin.

Jason Stanley -- Vice President of Investor Relations

Thank you, Sheryl. Good morning, everyone and welcome to Tidewater's earnings conference call for the period ended September 30, 2019. I'm Jason Stanley, Tidewater's VP of Investor Relations and I'd like to thank you for your time and interest in Tidewater. With me this morning on the call are, our President and CEO, Quintin Kneen; our Chief Accounting Officer, Sam Rubio; and our General Counsel and Corporate Secretary, Daniel Hudson. After I cover a few formalities, I will turn the call over to Quintin for his prepared remarks. We'll then open up the call for you to ask questions.

During today's call, we may make certain comments that are forward-looking and not statements of historical fact. There are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we make during today's conference call. Please refer to our most recent Form 10-Q for any additional details on these factors. This document is available on our website, or through the SEC at sec.gov.

Information presented on this call speaks only as of today, November 12, 2019 and 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 will present both GAAP and non-GAAP financial measures, a reconciliation of GAAP to non-GAAP measures is included in last evening's press release.

Now with that, I will turn the call over to Quintin. Quintin?

Quintin V. Kneen -- Chief Executive Officer

Thank you, Jason. Good morning, everyone and welcome to the third quarter of 2019 Tidewater earnings conference call. I'm excited to be leading this call today, a lot has happened since we last spoke, and we have more positive change and progress that I believe will make you as excited as I'm. Tidewater is determined to lead the offshore industry through the remainder of the recovery. We have the industry's leading balance sheet, which we are taking steps to enhance even further. We have led the industry thus far in consolidation and we are preparing our infrastructure, capital structure to consolidate the industry even further. We will use the improving industry fundamentals to get day rates back to where they need to be to properly compensate our capital providers and we will continue to lead the industry in recycling and capital discipline.

As previously announced, we've recently streamlined our corporate management team. In addition to the publicly announced management changes, we also made significant reductions in staff at our corporate office at the end of October. These organizational changes will result in the five Managing Directors responsible for the company's primary operating segments to report directly to the CEO. And we are still in our corporate culture, where the functional groups that remain at corporate or charter to find ways to support and enhance the productivity of the five leading Managing Directors.

One of our primary goals is to reduce bureaucracy in order to increase the speed of decision making and empower people closest to the vessel to make decisions and take ownership. To that end, since the merger in November of last year, we have also been redesigning and implementing the state-of-the-art shore-based information management system. I'm a strong believer in leveraging technology to create standardization and scalability, and to reduce what we refer to internally as administrivia and clutter. This dedication to creating efficiency with technology extends across both financial information and ship based management systems.

These transformational changes are in response to changes in the industry. Tidewater had been successful in the past, focusing on utilization and a price taking philosophy that generated sufficient cash flows to keep the business running.

Over the past five years, the industry has shrunk. Tidewater's business has shrunk. And the profit margins generated by a basic price taking philosophy have shrunk considerably. To respond to industry conditions today, we needed to change the business and the financial incentive to empower those closest to the vessel or push day rates back to where they need to be to support our capital investment and to incentivize those leaders to grow a cash flow positive business. The process of significant cultural transformation doesn't happen with small incremental changes. You have to break it before you can fix it. You have to take big bold steps to redefine the culture and that's what we have done.

As a result, it requires key agents within the company to wear multiple hats for a limited time. It's nothing that these individuals haven't done before, including myself. Along those lines, it's probably appropriate to mention that it is not my intention to go without a CFO, although I do like the lower G&A costs that result. The recruiting process for CFO is under way, and I anticipate that we will conclude the search by early in the first quarter of 2020.

Having said all this, I have some prepared remarks on how we are approaching our operations today and on current market conditions. I will go through these and then discuss the quarterly numbers before opening it up for questions. Getting to the highest return on possible on the portfolio of vessels we operate today is a key priority for Tidewater. We have always been everywhere geographically, and this has been a positive attribute for Tidewater for decades. I have no problem being anywhere we're paid well to be but that's not happening in today's market and it's seldom been the case in some geographic markets.

Vessels are real assets that have frictional cost of relocation and some are under long-term contracts, that require us to keep them in a location where we would otherwise move them more quickly out of. So the process of reallocating the portfolio will take some time. But swapping assets with other large players, we're selling off regions as an alternative to working ourselves out of a position in a less desirable market. Each region of the world has attributes that need to be considered. Areas such as Brazil and Australia can be alluring due to the headline day rates in those regions, but often been -- well, those headline day rates are often well above the world averages, but the ultimate cash returns in those regions are often less than desirable.

Other areas such as Southeast Asia have historically been very appealing, but the oversupply of vessels has enhanced protections and restrictions in the region and has diminished the appeal at least for now. So much like many of our customers, we are focusing on the regions and activities that we believe will provide the best opportunities and returns on capital. We are likewise taking the disciplined approach to our decisions regarding the drydocking of vessels and service and what to do with the vessel layup.

One of the challenges facing owners in our industry, Tidewater included is the number of drydocks required to be completed in 2019 and 2020. For example, we have 158 vessels in service during the third quarter. Vessels require a major drydock every five years, which equates to 32 vessels per year on average. The average drydock cost is approaching $1.2 million, which equates to $38 million per year of reinvestment in the fleet on average or $9.5 million for quarter. This year, we are estimated to spend over $60 million on drydocks. Not all of this will be paid in 2019, but $44 million has been paid year-to-date and $15 million was paid in the third quarter. As a reference, cash spent on drydocks for the full year of 2018 was $26 million for a fleet of 142 active vessels.

The lumpiness of the drydock cycle was due to the delivery dates of the vessels and 2009 and 2014 were big years for vessel deliveries. Consequently 2019 is a big year for five and 10-year old vessels going through their first inspection special surveys. Key to us at Tidewater are doing the drydocks in the most cost efficient manner and only doing drydocks at the vessels economic outlook justifies the investment. We have 60 vessels in layup and managing that oil fleet costs us approximately $400 per day per vessel, or $8.8 million per year. I can tell you with near certainty that these vessels are not all going back to work and our intention is to whittle down those fleet and lay up to the dozen or so vessels that were certainly returned to service.

Our intention for the vessels, we do not keep as to sell them out of the industry or send them through the recycling yard. The cost to reactivate these vessels is approximately $90 million. So it's not just a $400 per day, but the continued escalating cost of reactivation as the vessels continue to age and deteriorate. And every year, the remaining economic life decreases. The false hope presented by the low cost option of keeping vessels in the way, if that are not economically viable, tends to lower owners and to keeping vessels longer than they should.

Focusing on our balance sheet and on those assets that are working and tightening up the global fleet will provide us more long-term benefit than paying $8.8 million per year for vessels that are unable to work today and unlikely to ever work in the future. The other very real fact for owners to consider is that the human capital market throws in the towel much more quickly than the capital holders of those idle vessels. The mariners in this industry in 2015 that were let go have moved on. Other sought out higher paying onshore or in other shipping sectors. Around the world today, there is a shortage of mariners in the offshore industry. The industry reduce wages significantly during the downturn, which is one of the many levers we used to get through a downturn, but the global market for mariners extends well beyond the oil and gas industry. Wage pressure in today's offshore vessel market is a force all owners will need to deal with in the future.

As a result, the global fleet in layup will not result in incremental cash flows to capital providers because mariner wages will have to increase significantly in order to accrue the incremental vessels. In 2009 to 2012, a prior expansion period in the industry, mariner rates in some regions like the US, Gulf of Mexico rose 30% to attract mariners back into the industry. And remember, you don't just suggest the wages for the one vessel you're reactivating, you are adjusting them for the entire regions and Mariner Group. So it's not just at the industry is unlikely to get back to the drilling levels required to employ the vessels in lay-up today, it's that even if we were to do so, the return to capital providers won't be there, because it will be absorbed by increased mariner wage rates.

Similar to what has been experienced in the past, having active vessels to the fleet, holds down vessel day rates and increases mariner wages and perpetually pushes out the return on capital to providers. The best option for capital holders to get out of this predicament is through consolidation. There are too many management teams protecting too many vessels that have too much debt, By creating a truly scalable infrastructure Tidewater consolidate the industry. We can remove excess G&A and we can rationalize the global fleet.

So my message is that Tidewater will not be shy in taking a blow toward to the fleet in lay-up. And my message to owners and capital holders outside the Tidewater is that consolidation and fleet rationalization is the best way to maximize your investment. We have no required capex. We have no vessels under construction. Every investment we make is our decision based on today's economics. We continue to work on optimizing our balance sheet and our focus on keeping our low net debt position, which is truly noteworthy and unique in our industry. You may have seen that we launched a bond consent solicitation to modify certain terms of our existing $350 million face value 8%, 2022 senior secured bonds. We are asking for about 16 topical modifications, including using the ability to operate internationally, improving administrative efficiency, and lowering the required financial coverage ratio.

We have also launched a separate tender offer conditioned on a successful consent for $125 million of the issue for a tender premium of up to 8.5%. This is the first of several steps to reset our debt capital structure, so that it is in a position to be strategically refinanced. And in addition to providing meaningful improved operational flexibility, the notes modifications allow for our revolving credit facility and the ability to refinance the other outstanding debt.

In addition to seeking modifications to the indenture, we intend to file two S-3 shelf registration statements over the next few weeks. The first S-3 will be to register some of the warrants that are outstanding from the restructuring and the 2018 merger. The second S-3 will be a customary universal shelf registration statement registering various forms of debt and equity securities and providing us with the increased flexibility to opportunistically and efficiently access the capital markets. The steps we are taking or planning to take with respect to the 2022 notes and the registration statements are being done to provide the flexibility to facilitate an optimal capital structure and industry consolidation.

As it pertains to the industry as a whole over the next two quarters, we are entering into the softer quarters of the year. The fourth quarter will be a step down from the third quarter, and the first quarter will be a step down from the fourth. The best thing I can say about this is that it tells me that the world is getting back to normal slowly, but getting back to more normal offshore work pattern that reflects the preference of doing work in the warmer times of the year. We saw limited seasonality in the depths of the downturn as operators were only doing required offshore maintenance, which is consistent throughout the year, but a lower level of activity.

The North Sea and Mediterranean Sea markets performed well in the third quarter, with active utilization approaching 93%. In early November, one customer chartered over 10 vessels, which will help tighten up the market there through the remainder of 2019. I remain optimistic about the North Sea market as I look into 2020, we did see average day rates decline in the North Sea from the second quarter, but that was due to the contract roll-off I mentioned on our second quarter call.

Activities in the Middle East and Asia Pacific are also continuing to improve. This is the one region where we saw average day rates increase from the second quarter due to an increase in deepwater vessels operating in the region during the third quarter. I continue to see improvement in this market, as we go into 2020. It's not generally a high day region, but our team there has been successful in getting long-term contracts for deepwater vessels and in getting our customers prepaid for drydockings, which is an important consideration for us in the decision to reactivate the vessel.

The West Africa region had significant drydock activity during the third quarter as well as the second quarter, which has kept profitability down in that region for the past six months. We anticipate operating margins returning to what we would expect for the region in the low '40s during the fourth quarter. Activity increases in the region during the first half of 2019 were significant, but we anticipate a low in activity increases until the second quarter of 2020, when new drilling programs are set to commence.

The Americas region was another region that has significant drydock activity in the second and third quarters. Nonetheless, active utilization stayed in the mid 80s which is very good based on the number of drydocks in that region over the past six months. Activity in the Southern Caribbean, subset of the Americas region is expected to improve significantly in the fourth quarter, even though we typically see a slight downturn in the fourth quarter due to regional seasonality.

So with all that as a backdrop, let me walk through the third quarter and talk about how I see the business over the next few quarters. Revenue for the quarter was $120 million, down $6 million from the second quarter. Two big factors drove the decrease, we have those very lucrative five-year contracts that were cut in 2014 that rolled off in the second quarter and we had five fewer vessels operating during the quarter. The five fewer vessel operating during the quarter reflects the fact that market conditions for older tonnage is still weak. As our older tonnage rolls off contracts, they are going to layup. We are simultaneously reactivating higher specification vessels, which begins to offset the decline, but market conditions today are only good enough to reactivate a select group of vessels in lay-up.

As it pertains to the fourth quarter, we see a similar number of net vessels going into lay-up. As I look into the first half of 2020, I see tightening in the West Africa and Middle East markets that will allow several of the vessels that gone into lay-up in the second half of 2019 to be reactivated. We are also pushing day rates, particularly on the larger vessels and my expectation is that the day rate trend will begin to increase again as we go through the first half of 2020.

Vessel operating costs of $81 million was essentially flat in the third quarter, although the number of vessels dropped by five vessels or approximately 3%. This is due to the simultaneous mobilization and lay-up of vessels. Vessels just coming out of reactivation and vessels going into layup of a higher than average per day costs. My expectation is that we will see opex per active day level off over the next two quarters. As I mentioned above,included in the $81 million is approximately $2.2 million or $8.8 million per year of cost related to managing the fleet in layup.

So as a result, gross margin for the quarter at the vessel level was $39 million or 32%. General and administrative expense was $30 million in the third quarter, but that reflects a number of big-ticket items that are non-recurring. It includes $6.3 million of severance-related costs due to the staffing changes we affected before the end of the quarter, including the wages and benefits of those individuals for the full quarter. It also includes $650,000 of professional service fees related to the implementation of the SAP system.

We did another substantial reduction in force at the corporate office in October, so those wages and salaries are also in the third quarter numbers and a portion, along with our severance will be in the fourth quarter numbers as well. We set our year-end annual run rate objective at $87 million or $21.8 million per quarter and the changes enacted in the second half of 2019 make me extremely comfortable that this objective will be met.

Tidewater's goal is to lead the offshore industry out of the current oversupply situation and reshape the sector so that an acceptable return on capital becomes the norm. Our vision for Tidewater is to be the company with the highest return on capital and the offshore vessel industry. We have the industry's leading global footprint and our new information systems give us a truly scalable infrastructure platform. Our financial strength, global scale and low cost infrastructure positions us to consolidate the industry and incrementally grow our consolidated return on capital.

Tidewater has the industry's strongest balance sheet. We are dedicated to keeping it. Doing so requires us to develop a business that is free cash flow positive and requires that any potential consolidation would be done principally on a stock-for-stock basis and that these stocks are appropriately relatively valued. We closed the quarter with $363 million of cash. We have $430 million of debt. The bulk of which matures three years from now in August 2022, but we are easily able to service the debt and can readily refinance the debt given our cash on hand.

As a result of our gross, cash and debt position, we have been incurring a negative carry of over 6% per year on the balance. For this reason and the other reasons indicated earlier, we launched the consent and tender. Importantly, our path to acceptable free cash flow generation isn't predicated on a recovery in the drilling market. It's based on designing our shore-based infrastructure to be efficient and fully scalable. It's based on focusing our vessels in the fewest regions possible while driving the highest margin on those vessels. It's about tightly managing the required investment in those vessels. It's about rationalizing the fleet and layup. And last but certainly not least, it's about keeping the net debt low, and keeping working capital investment at a minimum.

We are transforming Tidewater to be the highest return on capital offshore vessel company in the world. That transformation require substantial changes to the organizational structure, which are largely complete. It requires a cultural transformation to reduce bureaucracy, improve decisiveness and enhance accountability, which is under way and enabled by the new organizational structure and our new information system. It requires the optimization of the investment in physical location of the assets, which will occur over time, but which is in process. And it requires the right capital structure, which we are addressing through the indenture modifications and the S-3 registration statements, and all of this can be significantly enhanced through sensible consolidation of the industry.

And with that, Sheryl, would you please open the call up for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Sven [Phonetic] from Clarksons. Your line is now open.

Sven Sele -- Clarksons Platou Securities -- Analyst

Good day, Quintin. I have a couple of questions for you.

Quintin V. Kneen -- Chief Executive Officer

Good day to you.

Sven Sele -- Clarksons Platou Securities -- Analyst

So previously, you had guided on G&A run rate target of $87 million per year. But in light of the recent announcements around organizational changes and all that, do you see a potential for improving that target for 2020, or what's your thoughts around that or what's your thoughts around that?

Quintin V. Kneen -- Chief Executive Officer

I believe that the target that we set for ourselves will easily be beat, and I look forward to updating you in Q1 on where I think we can push that number long-term.

Sven Sele -- Clarksons Platou Securities -- Analyst

Okay. That's positive. Thank you. And in this quarter, you had some extraordinary costs related to organizational changes, do you expect the level of those cost to remain the same in the fourth quarter or higher or lower?

Quintin V. Kneen -- Chief Executive Officer

They will be lower in the fourth quarter, but they will be there, and they will be noticeable. Obviously, taking half the Section 16 officers, that we publicly announced back in September has a higher cost. But the reorganization and the reduction in force that we did in October also took out significant number of people and there'll be some vesting of shares and some severance related to that. Most of that similar to this time will be non-cash.

Sven Sele -- Clarksons Platou Securities -- Analyst

Okay. Thank you. And you reported that you had reactivated five larger high specification vessels in this quarter. So I just wondered, what's the average reactivation cost per vessel. And in case you have the contracts in hand for these vessels. Could you say something about the average duration and the EBITDA margin for the contracts? And also what's the...

Quintin V. Kneen -- Chief Executive Officer

Yeah. I'll tell you the reactivation costs has fluctuated between just under $1 million to over $3 million per copy on those vessels. So it's hard to generalize right now, because of -- a lot of it has to depend on the quality, the build of the vessel, as well as how long it was in layup. So I will tell you that the range in there has been on average about $1.5 million to $2.5 million, but we have seen that over $3 million and we have seen an under $1 million. The vessels that remain in layup today are the ones that are more expensive to reactivate.

So, for example the next large vessels that we expect to reactivate will be closer to that $3 million range to the high 3s, almost $4 million range. So, when I talk about the reactivation of vessels in the global fleet and layup, not just ours, that's a very significant cost to overcome. So you only want to do it, when you have a vessel that you know you can continue to work over the next five to 10 years and a lot of vessels just don't meet that criteria today. So the margins have been very good and most of the boats have been reactive -- in fact all of the boats have been reactivated under long-term contracts.

Sven Sele -- Clarksons Platou Securities -- Analyst

Okay. Thank you. And one last question for me. So the OSV market is showing some modest signs of recovery with a broad-based uptick in rates, especially for larger vessels. Now within the third quarter, average day rates for your fleet decreased partly explained by some downward repricing of legacy contracts as you mentioned. Do you expect that the mark-to-market effect as vessels roll on to new contracts will be positive going forward, in the form of increased average day rates or could we still see some quarters with significant effect of legacy contracts being repriced downwards?

Quintin V. Kneen -- Chief Executive Officer

No, I don't see what we saw from Q2 to Q3 in the step down. We had some very nice lucrative contracts that rolled off during Q2 -- at the end of Q2. And as a result, I don't expect to see that again. Now, it's always difficult as you roll into Q4 and Q1, because you just don't know exactly where the spot market is going to go in some regions of the world and it is the softer period of the year. In my prepared remarks, I was talking about the trend increasing and I generally believe that. I mean, everything that we're pricing out today, especially for tonnage that's a 1,000 square meter deck or even tonnage that's 850 square meter deck and above is pricing up nicely above where it is today. So in the $2,000 to $3,000 a day range higher, OK. So that roll on effect when it occurs will be nice. I don't think we're going to see it printed in the quarterly P&Ls, until kind of a first quarter, second quarter of 2020.

Sven Sele -- Clarksons Platou Securities -- Analyst

Okay. That's understood. Thank you very much, Quintin. Have a good day.

Quintin V. Kneen -- Chief Executive Officer

Thank you, Sven.

Operator

Our next question comes from Patrick Fitzgerald from Baird. Your line is now open.

Quintin V. Kneen -- Chief Executive Officer

Hello, Patrick.

Patrick Fitzgerald -- Baird -- Analyst

Hello. How are you?

Quintin V. Kneen -- Chief Executive Officer

Good. Thank you.

Patrick Fitzgerald -- Baird -- Analyst

So I just few items, first on drydock $60 million this year, I believe, next year is a kind of a higher amount, could you update us on what that's going to be looking like?

Quintin V. Kneen -- Chief Executive Officer

So we're under a long review on drydocks for 2020. I don't believe it will be higher than what we're seeing in 2019. But it will be high relative to, what -- I think the average would be. So as a result, I can't give you a number today. I don't believe it's going to be as high as what we experienced in 2019. What we're doing as we go through our budgeting process for 2020 is scrutinizing heavily those drydock investments and what we're trying to do is, make sure that every one of those investments is justified. So I'll be able to give you a little more clarity, when we do the Q4 call.

Patrick Fitzgerald -- Baird -- Analyst

So someone -- somewhere between what you said is the average of $38 million and $60 million this year.

Quintin V. Kneen -- Chief Executive Officer

That's correct.

Patrick Fitzgerald -- Baird -- Analyst

Okay. And are you seeing competitors miss drydocks or push them out potentially leaving less supply in the markets, where you operate, or they basically coming up with ways to hit those drydocks kind of creatively?

Quintin V. Kneen -- Chief Executive Officer

Well, they are, for the most part, finding ways to hit those drydocks. But there is definitely have been perhaps less than 10, but there have been situations where vessels that are approaching their five-year survey have actually gone into layup, because they didn't feel that they could either justify those drydock or couldn't find the money for the drydock. Unfortunately, I mean, this is a little bit of the tone of the prepared remarks, I mean, what I see happening is capital holders and capital providers still trying to hold out. And I don't disagree on the younger vessels, but the older vessels in particular, people need to throw the towel in on. But now that hasn't have a measurable effect in 2019 of decreasing the supply of modern tonnage.

Patrick Fitzgerald -- Baird -- Analyst

Okay. And then any sense of, of what you've done a really great job generating cash from selling some assets that you're not going to be able to use or scrapping them. Can you keep up that pace, or is that going to be a little bit slower next year, do you think?

Quintin V. Kneen -- Chief Executive Officer

Two things with relation to that. My intention is to get more aggressive in selling the vessel. So of the 60 that we have, getting rid of another 45 as early as we can in 2020 would be important to me. Prices on the tonnage that remained is lower, just because it's easier to sell the better tonnage and so that tonnage has already left, OK. So, and I do expect that there would be some of the tonnage disproportionate number that will go into scrap as we go into 2020. So I still expect to have a significant number, that number could easily be $30 million, it will be difficult to make that number $50 million.

Patrick Fitzgerald -- Baird -- Analyst

Okay. Thanks. That's helpful. And then just in terms of the consent solicitation and tender, you need 50% to consent correct? But you don't need to consent to participate in the tender, but you do need more than 50% to consent to do the tender. So yes, is that -- am I understanding that correctly?

Quintin V. Kneen -- Chief Executive Officer

You are understanding that correctly. But I will say that precisely, 50.1% is what I need if you will, yeah, I need above 50%. So once the tender is, -- once the consent is confirmed, the tender will be activated.

Patrick Fitzgerald -- Baird -- Analyst

Okay. And then your -- you highlighted some of the keys that you want through this process, operate internationally easier ability to refinance that, I haven't seen all the documents yet at this point, but is there, could you provide any more color on, like what exactly the current indenture doesn't allow you to do that would be nice to be able to do?

Quintin V. Kneen -- Chief Executive Officer

Sure. I'll give you some general comments, but we can also forward you a summary of it, because just because there are 16 modifications, it will be difficult for me accurately [Indecipherable] them all today. And we have your email address, and so we will do that and of course, anyone on the call that wants to, we'll definitely do that as well. But there are certain things that are overly restrictive. For example, we can reflag a Jones Act vessel out of the Jones Act, OK.

Now there's reasons that creditors don't want to do that, because it's actually easy to mortgage a vessel in the US. But what happens is the smaller vessels that we have in the US that would ideally be working in Mexico or in the Southern Caribbean or even in Africa, that will require I mean to either not be able to work there, because our flag state requirements in those local jurisdictions, or to keep them crude with US mariners which is an expensive proposition. So decreases in my opportunity set because, I'm obviously competing with local vessels in those situations. So that's one example of it.

There's a few more examples related to how we operate internationally from a cash consolidation standpoint. What we'd like to do is make sure that we can easily manage the cash flows and not have to maintain any type of bureaucratic infrastructure in certain areas of the world. So that's another element that you'll see in those 16 modifications. Yeah. One of the bigger ones that most people will focus on is the reduction in the required EBITDA to interest ratio. It's obviously, we printed $80.5 million of EBITDA this quarter. Our interest is on an annual basis is probably approaching $32 million. So we're easily over 2 times today, which is the maximum of that ratio gets up to.

But what I don't want to be forced to do is work boats just to create EBITDA. There is a phenomenon in our industry, which is, I can actually be cash flow neutral on a vessel, but create EBITDA because what ends up happening is, I'll spend as much on the reactivation of the vessel as I will earn in EBITDA. It creates EBITDA for me, but it doesn't create cash flow. And I don't want to be put into those position. So one of the reasons for getting some flexibility on that ratio is just to make all those sensible decisions and withhold capacity from the market when it's appropriate to do so. But let me send you the list, that way you can take a look at it and if you have any questions, you can give us a call back.

Patrick Fitzgerald -- Baird -- Analyst

Yeah, sorry. Just one more, do you have a specific number of cash on the balance sheet that you want to keep, so that you wouldn't want to upsize this tender, if you get good support for it.

Quintin V. Kneen -- Chief Executive Officer

Well, I think we -- I do believe that we will have very good support for the tender and I don't -- taking out the bonds of $108.5 to me is a good balance for both the bond holders and the equity holders today. I expect that it will leave about $200 million of cash on the balance sheet as a result of this transaction, which is still a bit of a negative carry. But to me, as I mentioned earlier in the prepared remarks, this is the first step of two or three step process of widening the capital structure. So taking all the bonds out today is not practical. I think that I want to take out as much as I can. If I can upsize it, I may. But then you would look to us to do some other activities like putting in the revolver that we're not allowed to do, as well as taking out the bonds before the maturity and call it to 2021 timeframe.

Patrick Fitzgerald -- Baird -- Analyst

Okay. Thank you very much.

Quintin V. Kneen -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Stefan Dido [Phonetic] from Atlanta. Your line is now open.

Stefan Dido -- Atlanta -- Analyst

Thank you. Hi. Quintin, quick question. In the second quarter call you guided for average vessels being, I think 11 down to this quarter and then another six in the fourth quarter. Now that turned out to be a bit less with only five vessels left. So could you elaborate a bit on what changed there? Was there better employment prospects of vessels you expected to go idle? What was, what was behind that?

Quintin V. Kneen -- Chief Executive Officer

It was a combination of a number of factors. One is, some of the vessels that we were expecting would roll off or actually getting extended on their existing contracts. So as a result, they didn't roll-off in the third quarter or they roll off much later in the third quarter. So as a result, it didn't impact the average number as much as we anticipated. We are able to keep more boats working and we put a couple more boats to work than I was anticipating at higher day rate, so that to me was encouraging as well.

Stefan Dido -- Atlanta -- Analyst

Okay. And then on the vessel margin that you guided in the call to last quarter call to something like 34, that came in is that lower? And you also mentioned that you expect this to ramp up again in the fourth quarter, is this still on track, or is this more difficult to achieve right now, the improvement into the fourth quarter?

Quintin V. Kneen -- Chief Executive Officer

So, the improvement -- couple of things are happening that brought that down. One is, when we are reactivating those vessels that we were just talking about, it just cost a little bit more money when you're initially reactivating those vessels and so that burned up some of the margin that we are anticipating being saved in Q3. We do it because, we think it obviously will make more money on reactivating the vessels and keeping the vessels working as we go through the Q4, Q1 timeframe.

I do still expect the general trend on the older vessels in our fleet to drop out. So the vessels that I anticipated dropping out in Q3 and in Q4, a portion of them I was expected to actually get reactivated in the first half of 2020. And the way that it's working out is some of those older books are being extended on their contracts. The ones that are truly on their last contract, if you will, maybe they don't fall out of service in Q3 they fall out of service in Q4 or Q1. But when they fall off of service, they're going to go into lay-up. So as some of those are just inevitable.

What I'm hoping for is those vessels that continue to get extended are extended to a period at a time when we can also reactivate some of the newer tonnage, so that the overall drop in active vessel count isn't a significant. But as I look to Q4, I'm still seeing about another net five, and that to me feels right, obviously we're a month into the quarter. Q4 is always a softer quarter anyway, so it's harder to extend anything that actually matures in this quarter. So my anticipation is that we will be down five.

Stefan Dido -- Atlanta -- Analyst

Okay. And then final question, we have some -- we have the vessels operating right now. If I understand it correctly, some of those will roll off contract and then go either into layup or being scrapped. Then, you mentioned 12 to 15 of the vessels currently stacked are vessels you want to keep. So if then, let's say the roughly 170 number of vessels the fleet size going forward that you see right now?

Quintin V. Kneen -- Chief Executive Officer

Well, I do have a rule of not doing math on the conference call. But I think that you've got it right, which is essentially, we will take out 45 from the existing fleet, and that will result in an overall vessel count in the 170 range.

Stefan Dido -- Atlanta -- Analyst

Okay. Thanks.

Operator

[Operator Instructions] And speakers at this time, I show no further questions in queue.

Quintin V. Kneen -- Chief Executive Officer

Sheryl, thank you very much. Thank you everyone for participating on the call today and we look forward to updating you in the Q1 2020 timeframe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Jason Stanley -- Vice President of Investor Relations

Quintin V. Kneen -- Chief Executive Officer

Sven Sele -- Clarksons Platou Securities -- Analyst

Patrick Fitzgerald -- Baird -- Analyst

Stefan Dido -- Atlanta -- Analyst

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