Matt Bird writes all sorts of nonsense, but he dedicates a large chunk of his time to writing game walkthroughs.
Now that the enormous Cowlipha is back to . . . normal . . . she has agreed to let Oliver, Esther and Drippy use her ship back to Castaway Cove. (She'll never use it—the lady's a ship unto herself.) Time to take to the high seas!
Despite evidence of thiefly dastard-do, the trip back to Castaway Cove is uneventful. Less calming is your first steps back into the port town, as the thief will steal the picture of the Great Sage—and the Letter of Passage! Swine! Save, heal, and chase him to the port.
Sindbah isn't so dumb to be fooled into thinking the letter belongs to the man, and he denies him passage. Something's not right here, though, and when you see purple rising off of the thief's shoulders, Oliver will solve the problem in an instant—a Nightmare. Swaine's Nightmare attacks!
This Nightmare, looking a bit buffer than the last, is nevertheless a bit easier thanks to Esther. It has three attacks: standard slashing; Grudge, which can Curse a character, and Bad Dream, which may put everyone to sleep. The last is understandably the worst and should be Defended against at all costs. Peg the creature from a distance with spells, wait for yellow glims to pop out, and keep your HP high. Try not to engage the Nightmare with melee attacks—its swipes are bit too strong to resist for long.
Even if you do beat the Nightmare, the thief (Swaine?) remains heartbroken. He wants you gone. The group decides that he needs a touch of Restraint to feel better, and the Governor is just the man to lend it. Head to Cat's Cradle in town to find him. Take Heart his Restraint, sleep and save while you're here, and return to the thief. Give Heart to bring him back to normal. (He's still a jerk.)
Set Sail to Autumnia
After a great deal of talking, Swaine will agree to show Oliver and Esther to the Great Sage in the picture. What's more, he'll join the party, and bring in his own familiar to boot! You've got a full set now! Most excellent. Once Swaine shows off his long-distance treasure snagging skills and gets the party a Fling Flame Gem, Sindbah will order everyone on board. Time to set sail to Autumnia! Go save, then climb on board!
Despite how Drippy sounded on the dock, as well as the scene involving Shadar and the White Witch, you aren't in immediate danger . . . you just shouldn't set out to deep-sea unless you're really looking for a scrap. There's also plenty left to do in Castaway Cove now that you have your own ship, including a heap of bounties and errands. Get to them before you set out for Autumnia—who knows when you'll be back this way. (In other words, guess what we're doing in the next walkthrough?)