Tidewater Remains Best In Class, Despite The Elevated Price (NYSE:TDW)

Note: I previously covered Tidewater (NYSE:TDW). In my previous take on TDW, I pointed out the looming deficit of OSVs caused by limited supply and rising demand presented TDW as the best way to play that theme. Since then, the stock has increased by 30%. In this article, I discuss TDW’s last report, market updates, and 2024 expectations.

Introduction

The offshore industry remains one of the most attractive themes for 2024. The oil rigs and OSV offer significant upside potential with relatively limited downside risk at the current stock prices. Moreover, OSVs are in the early innings of the expansion phase of their cycle. TDW remains my favorite way to play that theme. SEACOR Marine (SMHI) joined the party, too.

Both companies delivered strong results in their last statements. As TDW’s CEO, Quintin Kneen, comments:

“Day rate progression realized during the year is faster than anything we have seen in the industry. The shortage of vessels, a record-low vessel newbuilding order book, and improving offshore vessel demand visibility all support improving operational performance into 2024 and beyond, as indicated by our continued confidence in our ability to grow revenue by 40% and grow gross margin by 66% in 2024.”

His words confirm my thesis on persistent OSV deficit, increasing the day rates. TDW has been the best performer compared to SMHI, Solstad, and Siem Offshore. At the present market price, it still offers growth potential.

TDW is the largest operator of offshore support vessels globally, with 217 offshore ships in total. It has successfully expanded its fleet through acquisitions of competing companies. The latest deal with Solstad added 37 vessels to TDW’s fleet.

The demand for OSV depends on deepwater exploration CAPEX, i.e., oil rig demand. The utilization rate for oil rigs is expected to reach 96% FY24, and the rig count is expected to grow by 6%. Oil rig day rates approached the threshold number of $500,00/day. Noble Viking drillship was contacted for a minimum of 140 days of employment in the Philippines. The contract value is $69.9 million. A 140-day contract span and $69.9 million value results in $499,285/day. Such figures show that the oil rig market is strong. In other words, the OSV demand will remain robust, too.

FY23 result discussion

TDW had strong 4Q23 and FY23. The company achieved leading-edge day rates at $29,150/day in 4Q23. The table below shows day rate growth over the last few years.

The day rates increased significantly following the tight market for OSVs. The supply side constraints are a well-known record low order book, an aging fleet, and declining shipyard capacity. The global OSV fleet is aging at a fast pace, as shown in the chart below:

The left one represents the declining number of vessels younger than 25Y. The rate of decline will grow during that decade. In 2036, 41% of the global OSV fleet will reach 25Y, as the right graph shows.

Given the higher costs (steel, labor, and capital) caused by structural inflation, building a new OSV is not economically viable at present rates. The following chart tells a lot about the economy of new builds.

At $44,000/day TCE, $10,400/day OPEX, 13% WACC, the $65 million cost of a new ship, and 20 years of useful life, the NPV is zero. The calculations consider three years of building time, 3% annual inflation affecting OPEX, and dry dock expenses. Simply put, ordering new OSVs at the current day rates is not a sensible decision.

In the long term, OSV’s deficit will grow, leading to higher day rates for longer. TDW FY23 results are proof of that. The company achieved $16,802/day TC rates in FY23, 32% higher than FY22 figures. Fleet utilization (total fleet) has increased, too, from 76% in 1Q23 to 81.5% in 4Q23. Higher TC and utilization rates resulted in $1.01 billion in revenue.

Over the same period, operating costs increased from $397 million FY22 to $556 million FY23. The major driver behind higher OPEX is increased crew costs across the quarters in 2023. For reference, TDW incurred $66.6 million in crew costs in 1Q23 and $97.3 million in 4Q23, a 47% increase over 12 months. The crew costs represent about 60-70% of total OPEX.

The shortage of skilled personnel is not limited to the mining industry. The offshore business suffers, too. Below is a quote by TDW’s CEO, Quinten Kneen:

“We do not have enough people, and they are not trained enough. What we are doing is more complex and advanced,” he said. “People need more experience and training as our activity is surging.”

Personnel deficit is the ultimate limitation of any complex industry. Even if we make all the investments required to build new OSVs/mines/rigs, their output will be limited by the ability of the employees to run them safely and efficiently. Building an OSV takes three years; however, creating an experienced seamen takes at least twice as long. I expect crew costs to remain elevated over the next few years.

TCE’s growth rate surpassed the company’s OPEX, so TDW delivered robust net income and EBITDA figures—$97.2 million and $386.7 million, respectively. It is worth mentioning that 2023 was TDW’s first profitable year (measured in net income) since 2014.

In 4Q23, TDW repurchased shares for $35.0 million at an average price of $59.29/share. In 2023, TDW spent $41.1 million on repurchasing its stocks. The Board approved another $48.6 million repurchase program.

TDW has a $1.1 billion backlog, with 75% of available vessel days contracted for 2024. FY24, the management projected $1.425 million in revenue, 40% higher than FY23 revenue. The expected Gross and EBITDA margins are 52% and 45%, respectively.

TDW balance sheet

TDW has a healthy balance sheet, considering its intensive CAPEX over the last two years. The company has 71.5% total debt/equity and 49.7% total liabilities/total assets. For reference, the 2022 capital structure was 20% total debt/equity and 33% total liabilities/total assets. In 2023, the company increased its leverage to finance the acquisition of Solstad’s vessels.

The chart below shows the company`s debt amortization schedule:

In 2024 and 2025, TDW must cover $100 million and $75 million of its debts. A large portion of the $300 million debt matures in 2026. TDW has ample liquidity: $274 million cash (ex. restricted cash), $104 million FY23 operating cash flow, and $176 million FY23 operating income. The net interest expense over the same period was $43.5 million. Even at present rates, TDW can maintain solid liquidity, ensuring the company’s ability to cover its debt obligations.

Valuation

TDW trades at high multiples, 5.16 EV/Sales, 17.32 EV/EBITDA, and 4.57 Price/Book, compared to its peers, SMHI, Siem, and Solstad.

TDW commands a steep premium due to its fleet (size and specifications). TDW has the largest OSV fleet globally, with 217 vessels. SMHI owns 58 vessels, while Solstad and Siem own 40 and 26 vessels, respectively. Being the largest company in the segment gives the first-mover advantage.

With rising day rates, considering management projections for $1.425 billion FY24 revenue and a $1.1 billion backlog, TDW still offers upside potential. Looking at forward multiples, 3.68 EV/Sales, and 8.26 EV/EBIDTA, TDW shares may reach at least $110-$120 if the company achieves its projections.

Final thoughts

OSVs are one of my favorite investment themes for 2024. Regardless of my conviction, the idea comes with a few financial, operational, and market risks. TDW maintains a conservative capital structure and adequate liquidity to cover its debts and finance its CAPEX/OPEX. The operating risk arises from the vessel’s age. TDW fleet is 11.8Y old, and SMHI is 9.4Y. With the rise in age, maintenance and repair costs are rising, leading to more extended downtime. TDW fleet is still young enough to avoid any significant technical issues. A more pronounced risk is oil rig demand. As mentioned above, the rigs market is strong, with day rates reaching the $500k milestone. The stronger the rigs market, the higher the demand for OSVs.

TDW delivered solid figures in its last report. I expect 2024 to be a great year for energy stocks in general. The management’s intention to keep repurchasing the company’s shares is another positive sign of TDW’s prospective growth. I still hold TDW and keep adding on the pullbacks. In my article on TDW’s 3Q23 report, I gave TDW a Strong Buy. Considering the significant price increase, the risk reward ratio declined, so I move the rating to Buy.