2023-12-18 18:03:36 ET
Summary
- Tidewater reported strong Q3 results, as dayrates continue to rise in the OSV market.
- Tidewater provided an upbeat 2024 outlook and is expected to benefit from higher dayrates and contract expirations.
- The stock remains the best way to play the rising trend in OSV rates.
Back in October , I started Tidewater ( TDW ) with a “Buy” rating, saying it was in the best way to play what ap peared to be an OSV supercycle. With the company reporting results last month, let’s catch up on the name.
Company Profile
As a refresher, TDW operates a fleet of offshore service vessels ("OSV)". These vessels are used to help support the offshore oil and gas industry for tasks such as towing and anchor handling for mobile offshore drilling units; transporting supplies and personnel; offshore construction support; geotechnical survey and seafloor evaluation; and other specialized services.
Within its fleet, the company owns platform supply vessels ("PSV"), which are used to carry cargo, as well as anchor handling supply vessels ("AHTS") that are used for towing, anchoring and other subsea operations. In addition, it also owns crew boats, offshore tug boats, and specialty vessels.
Q3 Results
For its most-recent quarter reported in November , TDW grew revenue 56% to $299.3 million. On a sequential basis, revenue rose 39%. That topped analyst estimates call for revenue of $291.9 million.
Average day rates increased to $17,865 per day, up from $16,042 in Q2 and $13,606 a year ago. It said leading edge term contracts increased to $28,609, up approximately $5,100 per day sequentially.
Adjusted EBITDA soared 125% to $117.2 million.
Revenue for its Americas fleet surged 80% year over year and nearly 40% sequentially to $70.3 million. It had 37 active vessels in the region, which was five additional active vessels versus Q2 and six more versus a year ago. The company said the region has seen a lot of demand throughout the year from Petrobras ( PBR ). Dayrates rose $3,226 per day quarter over quarter to $23,495 per day, while leading edge term dayrates were above $40,000 per day in the region.
Its Asia Pacific fleet revenue jumped 62% year over year and 71% sequentially to $38.6 million. It had 18 active vessels in the region, which was four additional active vessels versus Q2 and one more versus a year ago. Dayrates rose $1,617 per day quarter over quarter to $24,250 per day. The company did note that dayrates for smaller class PSVs did see a drop in rates in the region.
Its Middle East fleet revenue jumped 11% year over year and 9% sequentially to $34.7 million. It had 45 active vessels in the region, which was one additional active vessel versus Q2 and three more versus a year ago. Dayrates rose $105 per day quarter over quarter to $10,554 per day. TDW noted that the Middle East is the most competitive region and generally the last to recover.
Revenue for its Europe/Mediterranean fleet surged 96% year over year and 98% sequentially to $70.3 million. It had 37 active vessels in the region, which was 24 additional active vessels versus Q2 and compared to a year ago. Dayrates rose $115 per day quarter over quarter to $19,105 per day. The company saw weakness in rates for AHTS vessels, as dayrates dropped by -$5,865 to $31,048. The company has two of these types of vessels operating in the region.
Its West Africa fleet revenue jumped 31% year over year and 11% sequentially to $73.7 million. It had 69 active vessels in the region, which was four additional active vessels versus Q2 and two more versus a year ago. Dayrates rose $1,303 per day quarter over quarter to $15,772 per day. The company said it is seeing rising demand in the region and that it benefited from the rolloff of some legacy AHTS contracts.
Turning to the balance sheet, TDW ended the quarter with $734.7 million in debt and $275.1 million in cash & equivalents. The company also announced that it had authorized a $35 million stock buyback plan.
The company completed the acquisition of 37 PSVs from Solstad in the quarter, paying around $580 million for the vessels. The deal was completed in July, and the company said it has integrated 32 of the vessels into its fleet.
Looking ahead, the company forecast Q4 revenue to be about $309 million, with gross margins around 47%. For 2024, it guided for revenue of between $1.4-1.45 billion. It is looking for gross margins of 52%.
On its Q3 earnings call , VP of Sales & Marketing Piers Middleton said:
“ The outlook for the sector remains positive with market positivity being driven by the continued upturn in project investment, a supportive energy price environment, firm demand and ongoing constraints in fleet supply with demand momentum expected to build further into 2024 and 2025. None of the regions in which we operate are seeing any signs of slowdown at the present time. Rig rates and demand continue to improve with Clarksons Research reporting that demand has firmed by an additional 3% so far this year, driven by continued improvement in the Middle East. The number of active jack-ups rose to 158 units in the Middle East, up by 37% since the start of 2022, and demand is expected to increase by a further 10 rigs by the end of 2024 just in the Middle East. In addition, the MOPU sector remains very positive with a total of 15 new build and conversion contracts projected to be awarded in 2023, driven primarily by strong activity in South America, with a further 17 new build and conversion MOPU contracts expected to be awarded in 2024, totaling an estimated $16 billion of contract investment in 2024, which is close to the record high seen in this sector in 2022, all very positive indicators for the long-term health of the OSV space. ”
TDW turned in a strong quarter as day rates across most regions continue to rise strongly. The Americas region was particularly strong, as was Africa and Asia Pacific. Each quarter this year has just gotten stronger throughout the year.
Looking ahead, TDW offered an upbeat 2024 outlook that was higher than prior analyst estimates. The company will benefit from a full year of the vessels it acquired from Solstad, as well as the roll off of contracts and re-contracting at higher rates. Given that the company was getting $28,600 day rates for new contracts in Q3 versus its fleet average of $17,865 per day, you can see the huge upside as contracts roll-off. TDW’s contracts are typically under a year, except in the Middle East where they tend to be longer, so it should continue benefit from increasing rates.
TDW added debt in its Solstad vessel acquisition, so I'd like to see it use its cash flow to quickly pay that off. Debt got many companies in the industry in big trouble in the last down cycle, so the less debt it has, the better.
Valuation
TDW stock currently trades around 5.8x the 2024 consensus EBITDA of $641.1 million and 4.9x the 2025 consensus of $762.5 million.
It trades at a forward P/E of 20.4x the 2024 consensus of $5.83 and 9.0x the 2025 consensus of $7.46.
It’s projected to growth revenue by over 38% next year and nearly 14% in 2025.
There aren’t many U.S. traded OSV stocks anymore, with SEACOR Marine Holdings ( SMHI ), the other notable one. TDW trades at a lower valuation than SMHI, which trades at about 7.6x 2024 EV/EBITDA.
On a per ship basis, it trades at about $16.7 million per vessel based on its 223 vessels, which is slightly higher than the $15.7 million it paid to acquire the vessels from Solstad.
Placing a 6-8x multiple on 2025 EBITDA would give the stock a value of between $75-105. Given that TDW is one of the few ways to play the OSV market and rising rates along with the fact that there isn't much if any of a newbuild market, I think this is the best way to value the stock.
Conclusion
The OSV market remains hot given higher demand coupled with a tighter supply of vessels. As long as oil prices remain supportive, the industry as a whole should continue to see a rebound and day rates continue to move higher. Offshore drilling is much more expensive than onshore drilling, but the wells tend to be long lasting with lower decline rates, so drilling offshore wells is a long-term investment. Moderate fluctuations in oil prices shouldn’t impact this market as much, as long as drillers have a long-term positive view on crude prices. However, if oil prices were to collapse, given the expense of offshore drilling, that could impact the OSV market quite dramatically.
Right now, the OSV market is expected to remain strong with rates continuing to rise given years of underinvestment after the last oil price collapse. TDW continues to be the best way to play this trend, and it has a nice runway to grow EBITDA and cashflow just from contract expirations. As such, I think TDW remains a “Buy” with a $90 target price.
For further details see:
Tidewater Should Continue To Benefit From Hot OSV Market