Tidewater Inc. (TDW, Financial) is the leading provider of larger offshore service vessels to the global energy industry with a fleet of more than 350 vessels. It has a global footprint, with over 90% of its fleet working internationally in more than 60 countries. It transports crews and supplies, tow and anchor mobile rigs, assists in offshore construction projects and performs a variety of specialized marine support services.
Valuation
TDW is currently trading at 0.88x P/B, a 27% discount to its five year average P/B of 1.12x. Its previous historical P/B lows were 0.85x, 0.81x and 0.86x in 2009, 2010 and 2011 respectively. In terms of earnings-based multiple, TDW trades at 8.74x twelve months trailing EV/EBITDA and 15.84x P/E respectively. TDW achieved a five year average ROE of 10.64% and a 10 year book value per share CAGR of 7.98%.
Financial and Business Risks
TDW is moderately geared with a gross debt-to-equity ratio of 35% and a net gearing of 29%. It also has an interest coverage ratio of 4.6 and a current ratio of 2.1. This does not include off-balance sheet liabilities such as operating leases and vessel purchase and construction obligations amounting to more than $300 million, which adds to the $890 million of debt on its books.
The five largest customers and the top 10 customers of TDW accounted for approximately 43% and 59% of its 2012 revenue respectively. Customer concentration is partly mitigated by TDW's solid customer base, which includes four supermajors, three national oil companies and three international oil companies among its top ten customers. TDW’s top 10 customers contract 21% of the working worldwide jackup fleet (360 working rigs) and 53% of the working worldwide floater fleet (242 working rigs).
When commodity prices, or expectations for commodity prices are low, TDW's customers generally reduce their capital spending budgets for onshore and offshore drilling, exploration and field development and dampens demand for TDW's vessels. The level of offshore crude oil and natural gas exploration, development and production activity has historically been volatile, and that volatility is likely to continue.
There is a significant oversupply of natural gas inventories in the United States in part due to the increase of unconventional gas in the market, which results in depressed natural gas prices. The rise in production of unconventional gas resources such as onshore shale plays resulting from technological advancements in horizontal drilling and fracturing in North America and the commissioning of a number of new large liquefied natural gas export facilities are contributing to the demand-supply imbalance in the natural gas market. Low gas prices may result in a decrease in demand for offshore support vessel services, specifically TDW's shallow water U.S. GOM operations, which is more oriented towards natural gas than crude oil production.
Business Quality and Capital Allocation
TDW has the world’s largest and newest fleet, which provides the platform for continued earnings growth. As of August 2012, the global fleet is estimated at 2,788 vessels, including 467 vessels that are more than 30 years old and 274 vessels that are 25 to 29 years old. In addition, approximately 428 additional AHTS and PSVs, representing 15% of the global fleet are under construction. TDW has 252 ATHS and PSVs under its fleet, which trumps 151 and 111 vessels of its two largest competitors. Vessel utilization for the MENA and Sub-Saharan Africa regions are consistently above 60%; while TDW has achieved at least 50% vessel utilization for America and the Asia Pacific regions for the trailing twelve quarters.
While TDW has the largest number of new offshore supply vessels among its competitors, but it also has the largest number of older offshore supply vessels. Based on TDW's internal calculations and assumptions of 45 vessel disposals per year and newbuilds/acquisitions of 20 vessels per year in future, average vessel age has dropped from 20 years in 2006 to six years in 2012. Of TDW's 267 vessels as at June 30, 2012, 218 new vessels were in its fleet with an average age of 5.7 years.
TDW has a unique global footprint, with vessels geographically dispersed throughout the major offshore crude oil and natural gas exploration and development areas of the world. TDW leverages on its diverse, mobile asset base and the wide geographic distribution of its vessel assets by moving vessels between and within geographic regions to rapidly capitalize on changing market conditions.
TDW has paid dividends in every single year since 1995 with a yield of 2.2% and a corresponding dividend payout of 35.7%. Dividends are paid quarterly. Over a 13-year period from 2000 through 2012, TDW has paid out about $1 billion through dividends and share repurchases. Share repurchases have contributed to a 12% decrease in current shares outstanding compared with shares outstanding in 2002.
Management
TDW directors and officersare required to hold significant positions in company stock within five years of appointment or election—five times annual retainer or base salary for directors and its chief executive officer and three times base salary for other named executives. All directors and executive officers as a group own 2.5% of TDW's outstanding common stock.
Key executive compensation represented 17% and 13% of net income in 2012 and 2011 respectively. For fiscal year 2012, each named executive earned between 60% and 74% of his target annual incentive award. As in prior years, a substantial portion of each named executive's equity award will vest only if a particular long-term performance metric is met. For fiscal year 2012, the performance metric is TDW's three-year total stockholder return as measured against that of its peers.With regard to EVA, there has been no annual incentive paid on the basis of EVA in the past three fiscal years. It is worth noting that TDW has once again elected to use EVA as one of the performance metrics for annual cash awards, but has structured the program as a more traditional annual program, instead of a three-year program.
In fiscal year 2012, TDW announced the retirement of Dean Taylor, who has been with the company for 34 years and has served as chief executive officer for 10 years. In June 2012, Jeffrey M. Platt was promoted to chief executive officer. Following a 15-year career with Schlumberger Well Services and Rollins Environmental Services, Jeff joined TDW in 1996 as general manager of TDW's business activities in Brazil. In March 2010, he was promoted to chief operating officer of TDW.
Conclusion
TDW, with the world’s largest and newest fleet and a long track record of earnings growth, is the perfect proxy for improved working rig count and its resulting positive impact on deepwater and jackup support vessels globally. Valuations are compelling, with TDW trading for less than book and near its historical lows.
Disclosure
The author does not have a position in any of the stocks mentioned.
