2023-08-08 21:21:32 ET
Summary
- Tidewater Inc. reported Q2 results below expectations, with non-GAAP earnings per share missing consensus estimates by almost 30%.
- While results were impacted by vessel repositionings and bad debt expense, key financial metrics like revenue, adjusted EBITDA, average day rate and vessel operating margin advanced to new multi-year highs.
- Consequently, management reaffirmed previously issued full-year guidance. As a result of the recent Solstad Offshore vessel acquisition, Q3 revenues are expected to increase by at least $80 million sequentially.
- While I wouldn't chase Tidewater's shares at current levels, investors should consider using any major setback to initiate or add to existing positions based on my expectation for strong industry conditions to persist for an elevated period of time.
- Investors looking for alternative exposure to the offshore services industry should ponder an investment in smaller competitor SEACOR Marine Holdings, which might very well end up being Tidewater's next acquisition target.
Note:
Tidewater Inc. ( TDW ) has been covered by me previously, so investors should view this article as an update to my earlier publications on the company.
On 07th August, leading offshore support services provider Tidewater reported second quarter results below consensus expectations.
While key financial metrics like revenue, Adjusted EBITDA, average day rate and vessel operating margin advanced to new multi-year highs, non-GAAP earnings per share of $0.46 missed the analyst consensus by almost 30% as average fleet utilization was surprisingly down for a third quarter for a row:
That said, the company provided a reasonable explanation (emphasis added by author):
Utilization was down modestly during the second quarter as we withheld capacity and repositioned the fleet to maximize long-term day rates on a global basis , which resulted in more days of frictional unemployment as we targeted higher margin geographies for our vessels. The opportunity cost of this strategy to maximize day rates was approximately $8.0 million in the second quarter.
In addition, Tidewater experienced close to $4 million in aggregate bad debt and operating expenses in conjunction with the recent bankruptcy of leading domestic shallow water player Cox Operating LLC.
In combination, the impact on earnings per share calculates to $0.23. Without these one-time items, both revenues and earnings would have been slightly ahead of consensus expectations.
Consequently, management reaffirmed previously issued full-year guidance. As a result of the recent Solstad Offshore ( SLOFF ) vessel acquisition , Q3 revenues are expected to be at least $295 million:
Driven largely by the completion of the Solstad Offshore vessel acquisition, revenue for the third quarter should be up at least $80.0 million. We updated our view of the combined fleets and of the market for the remainder of the year and we reiterate our 2023 annual guidance of approximately $1.03 billion of revenue and approximately $500.0 million of vessel operating margin.
According to statements made by management on the conference call , the company secured new contracts for 26 vessels at an average dayrate of $23,500 during the quarter, almost 50% above the average dayrate reported for Q2.
Cash generation for the quarter was impacted by higher drydocking expenses and capital expenditures as well as tax payments and required investments in working capital.
That said, the company still generated $11.3 million in free cash flow in Q2 with management projecting significant improvements for the second half of the year.
Subsequent to quarter-end, Tidewater completed the previously announced acquisition of 37 platform supply vessels ("PSVs") from Solstad Offshore for approximately $580 million in cash.
We financed the acquisition through a combination of net proceeds from a $250 million 5-year fixed rate unsecured Nordic bond, a new $325 million, 3-year sulfur-linked floating-rate amortizing secured senior bank term, together with $18.5 million of cash.
Please note that the majority of these vessels will be working at less-than-stellar legacy contracts well into next year with some units fixed until 2025 or even 2026, so it will take some time for the true earnings power of the added vessels to unfold.
Based on statements made in the company's quarterly report on form 10-Q, Tidewater expects initial cash flows generated by the acquired vessels being sufficient to service the new debt, including scheduled principal payments.
In addition, the company received $111.5 million in cash from the exercise of warrants issued to legacy shareholders upon Tidewater's emergence from bankruptcy in 2017 which moved into the money just days ahead of their expiration date. In aggregate, the company issued 1.9 million new shares.
On the call, management also elaborated on future capital allocation with an ongoing preference for accretive acquisitions.
Absent sufficient M&A opportunities, the company would consider returning capital to shareholders but reading between the lines of management's statements, I do not expect Tidewater to reinstate its dividend anytime soon anymore:
Absent value-accretive M&A, we would seek the best ways to return money to shareholders. Frankly, we're making more money on our cash than we have in recent memory, but I'm still not looking to hold on to the cash and the associated negative carry.
Our current secured bond precludes any returns of capital until November 17 of this year, about 3 months from now. Also, any returns of capital would need to be measured until we have a debt capital structure that is appropriate for a cyclical business.
To me, that is a combination of long-dated staggered maturity and secured bond debt and an ample revolver, our recent unsecured financing is a step in that direction.
My belief is that we can make further strides in that direction over the next few quarters. And quite frankly, another appropriate acquisition could give us the scale to reset the debt capital structure accordingly.
While the heavily-fragmented offshore services market is likely to offer additional near-term opportunities, further increasing debt levels might fire back on the company in the future, particularly in case interest rates remain at elevated levels until the end of the current upcycle.
That said, with dayrates still moving higher and market conditions likely to remain strong for an extended period of time, cash flows should be more than sufficient to deal with debt taken on in conjunction with recent acquisitions.
Bottom Line:
Tidewater reported weaker-than-expected second quarter results due to the impact of strategic vessel repositionings and the recent bankruptcy of a major domestic operator.
That said, the company reiterated full-year expectations and projected free cash flow generation to increase substantially from subdued levels in H1 with further, material improvement anticipated next year.
After initially trading down more than 10% in Monday's after hours session, shares reversed course shortly after the start of Tuesday's regular session as market participants cheered management's market commentary and outlook on the conference call.
Following the recent rally to new multi-year highs, I have disposed of my remaining position in Tidewater at an approximately 200% gain over an 18-month time frame due to free cash flow generation having been much weaker than previously expected by me and little prospects for a near-term dividend reinstatement after the most recent acquisition.
In addition, based on my 2024 EV/EBITDA estimates, Tidewater is now trading at a premium to its closest NYSE-listed competitor SEACOR Marine Holdings Inc. ( SMHI ) or "SEACOR" despite the fact that SEACOR's profitability remains understated relative to Tidewater due to the company expensing all maintenance and drydocking costs rather than capitalizing a meaningful part on the balance sheet.
While I wouldn't chase Tidewater's shares at current levels, investors should consider using any major setback to initiate or add to existing positions based on my expectation for strong industry conditions to persist for an elevated period of time.
Investors looking for alternative exposure to the offshore services industry should ponder an investment in smaller competitor SEACOR Marine Holdings which might very well end up being Tidewater's next acquisition target.
For further details see:
Tidewater: No Reason To Worry About Weaker-Than-Expected Q2 Results