GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Value Idea Contest: Tidewater Inc.

November 24, 2012 | About:


Tidewater Inc. (TDW) 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.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


Rating: 3.4/5 (8 votes)

Comments

Patience Investing, Inc.
Patience Investing, Inc. - 1 year ago
how about free cash flow? i notice they have negative FCF in the last three years.

marklin
Marklin - 1 year ago


Hi Patience Investing, thanks for your comments.

My responses are as follows:

Over a 13-year period from 2000 through 2012, TDW has had positive operating cash flow in every single year, with positive free cash flow in five years (2000, 2006-2009). However, it is worth noting that TDW has funded the majority of capex for its fleet renewal and expansion program with cash flow from operations and disposal proceeds from the older equipment that TDW has sold. CFFO and proceeds from dispositions were $3.6 billion and $732 million, respectively, compared with $3.6 billion (of the total $4.1 billion capex) invested in new fleet over the same 13-year period.

TDW used to have a relatively old fleet with vessels ages above twenty years old, so a significant chunk of the capex in recent years was spent on the recapitalization of fleet. Based on TDW's internal calculations, average vessel age has dropped from 20 years in 2006 to six years in 2012. Given that TDW now has one of the youngest fleet in the industry, I will assume that most of TDW's current capex is directed at future growth, rather than maintenance capex.

TDW only started to invest in excess of operating cash flow in fiscal year 2011 with capex as a percentage of sales at a ten year high of 58% and also geared up with borrowings. In the first six months of fiscal year 2013, TDW generated $146 million of operating cash flow and spent $190 million on capex. In addition, TDW had cash of $137 million against debt of $890 million as at Sep. 30, 2012

Current capex as a percentage of sales is 33%, in line with historical averages of about 30%. The only exceptions in the past decade were unusually high and low capex as a percentage of sales of 58% and 20% in 2011 and 2006 & 2007 respectively.

Management claims that it is prudent in capital allocation. TDW repurchased $500 million of stock during the fourth quarter of fiscal year 2012, when management viewed vessel prices as unattractive. Over a 13-year period from 2000 through 2012, TDW has paid out about $1 billion through dividends and share repurchases. Also, a comfortable net gearing of 29% is not going to add tremendous stress on cash and cash flow.

Last but not least, I am not going to say that three years of negative cash flow is not a problem or that it can be ignored. However, there are two types of stocks - cash flow generating stocks and cash consuming stocks. Cash consuming stocks like TDW are in capital intensive industries like property development, shipping etc and are typically still in the growth phase. Even the best of the cash consuming stocks are unlikely to boost of a decade of positive cash flows, but that does not mean

that they are uninvestable. In summary, I am not too worried about the negative cash flow for two main reasons. Firstly, the $3.6 billion investment in new fleets is entirely funded with operating cash flow. Secondly, TDW's capex is transitioning from maintenance to growth, given the recapitalization of the old fleet is also complete with average age of TDW's fleet at six years.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK