Case Study on Capital Cycle: Tidewater

Below is a case study of the capital cycle using Tidewater as an example. This page will be updated over time. This is not an investment recommendation but an ongoing case study.

Capital Cycle Case Study: http://csinvesting.org/wp-content/uploads/2020/04/JAC-Case-Study-Capital-Cycle-and-Tidewater-1.pdf

Since Tidewater has been in business since 1955, its service is needed, but this is–at best–no more than an average business with no long-term competitive advantage. Currently, there is a trade-off between a decline in intrinsic value as time progresses without economic charter rates versus Tidewater’s competitive advantage over financially distressed competitors.

Update: 4/17/20

Tidewater filed to protect its $300 million in NOLs and $388 million in foreign tax credits. As an investor, you know that the NOLs can be worth more than $0 to worth a whole lot.

Meanwhile, Hornbeck (HOSS), a competitor filed for bankruptcy.

Update: 4/21/2020 US Crude oil near-term futures trade at a negative price for the first time in history. Natural gas is rising in price as shut-in oil wells reduce natural gas supply. What we are witnessing is a massive destruction of capital and productive capacity thanks to covid-19 and negative global interest rates. The future might require far higher oil prices. Near-term one would expect more pressure on TDW’s price because of the fear in hydrocarbon markets.

Update: 4/22/2020 TDW does not seem to be declining with oil prices–a divergence that may be signaling some change–perhaps investors are looking out at the supply destruction in oil.

http://siemoffshore.com/Default.aspx?ID=9

4/25/20: Siem Management in their 2019 Shareholder letter move from hopeful to despair. (A good sign for Tidewater). These are dark days for the OSV industry and what you typically hear about in the depths of a downcycle.

The Siem Offshore is exposed to a number of risks. One of the most important risk factors is the demand for its services. The OSV market is now in its 7th year of depressed conditions and it has taken longer to recover than earlier expected. It is highly uncertain as to when charter rates will offer sufficient earnings for full debt servicing. The Company has been able to reduce its debt substantially over the last five years. Principal payment of debt instalments in 2019 was USD99 million (2018: 195 million). The significant debt reduction has been possible due to good cooperation between the Company and its financing banks, significant shareholder support, good ship operations and disposal of non-strategic and older assets. However, the significant excess capacity in the worldwide offshore service vessel fleet has increased the competition amongst owners for any vessel requirements, thereby depressing charter rates. The imbalance of supply and demand for offshore vessels is expected to remain for some years and will continue to put pressure on the charter rates and our cash flows. Five vessels were in lay-up at year-end 2019.

4/22/2020 OUTLOOK from Siem Offshore’s Annual Report. Despair!

The collapse in the oil price and the effect of the COVID-19 on the world’s economies have created a very different operating environment for our fleet. Field developments offshore are being cancelled or postponed by our clients and there will be much less work offshore during the coming several years. The demand for our services will therefore reduce rather than increase. At the end of last year, we looked forward to a gradual recovery in offshore activities and the nearing of balance in supply and demand in the OSV sector. That hope is now gone and we brace ourselves for a downturn probably worse than we have experienced during the past few years.

The actions required to achieve the best possible outcome when
confronted with the market difficulties include consolidations between and among debt-burdened owners, such as practically all OSV owners in Norway. This is the time when owners should work together to embrace the opportunities to survive until the end of a long, dark tunnel of slow activity in the market for all of our vessels. Only by working together can the right scheduling and layup of vessels be achieved. The cost saving would be an added benefit. Most of our lending banks are lenders to several if not all of the competing OSV owners and are in the position to influence this required development. Disappointedly, the banks do not appear willing or prepared to assume this vital role.

The financial problems are currently solved independently within each company giving the owners more time to compete fiercely with each other, all to the benefit of the clients. Owners are seen to take higher risks as the clients take advantage of the desperate situations to shift operating risks from the clients to the OSV owners. The latter accepts the risks because they have nothing more to lose. Ironically, it is the banks who are exposed to the contractual downside in this new reality. This has created an artificial, unhealthy and unsustainable competitive situation in our industry.

May 17, 2020 Update. Tidewater currently trades at $4.13 or about 24% below its scrap liquidation value if we take Hornbeck’s bankruptcy filing as a guide.

Tidewater had 157 vessels operating at the end of the year. It took 4 of its active fleet to sell. So let’s take 150 vessels times $2 million per vessel (See last page on Hornbeck Bankruptcy filing below) for 300 million sales/scrap value then minus $85 million net debt for $215 liquidation value divided by 42 million shares or $5.11 per share. At $4.13, TDW trades 24% below this value.

I realize that the next twelve to eighteen months will be extremely difficult for TDW as it races to scrap excess vessels and conserve cash, but I don’t think it is a certainty that TDW will have to restructure it debt or declare bankruptcy again, but the market is pricing for extreme events ALREADY. The issue is whether to add on weakness.

The biggest risk is if financiers continue to throw good money after bad in this OSV industry. We shall see.

Update on June 3, 2020. Robotti Letter to Tidewater Board on Poison Pill https://advisors.robotti.com/blog-items/carpe-diem-read-robottis-letter-to-the-tdw-board-re-consolidation/

8 responses to “Case Study on Capital Cycle: Tidewater

  1. Thank you very much. I am a retail investor trying to learn, and the investment thesis laid out is very intriguing indeed. I am looking at Trican in Canada, and trying to find a pattern here.

    • All parts of the thesis have to work for this investment to be successful.

      Cheap–well below replacement values
      Supply/Demand changing to low supply
      smart management that can operate efficiently and allocate capital counter-cyclically.
      Strong balance sheet advantage relative to competitors.
      Reinvestment in offshore oil and gas.

  2. Note: Read the annual shareholder letters of Transocean (RIG) to keep
    up with the offshore market.

    Other offshore drillers include VAL, NE.

  3. So, far TDW is drifting lower as crude prices stabilize, but offshore oil is being
    shut-in. The good news is that sentiment in the industry is at rock bottom/despair. There is no news to spur new investors. I am happy to
    wait because supply is rusting in place, but now is not the time to add or press this position.

  4. As part of my ongoing diary in this capital cycle investment. TDW reported last night. Quarterly earnings are meaningless in the long-term scope of determining value, but it is interesting to see how the company preforms in the midst of a crisis–oil below $20, Covid panic, etc.

    The bad news was a moderate loss during a crisis and the slowest part of their business. Mgt. increased lay-ups. If this were to continue for years, then value would slowly decline relentlessly as its vessels age and charter rates remain uneconomic.

    The good news is that the company does not look like it will move towards bankruptcy. Mgt. will conserve cash. Just like in Uranium/precious metals mining, as time passes the supply/demand situation moves relentlessly in the company’s favor. The upmove will be longer and farther when it comes, but the turn seems further delayed. Also, the company can improve its situation by making an intelligent acquisition of distressed assets to upgrade its fleet.

    Finally, I expect TDW to sell off further, but if it doesn’t, then perhaps a lot of negative expectations are already embedded in today’s prices. END. I will increase my position if that occurs.

  5. Here is the current outlook from Siem Offshore 1Q 2020

    The previous positivism of an increase in upcoming drilling activity for 2020, has been turned into negativity, based on CAPEX-cuts from all operators in the wake of the collapse in oil price and challenges imposed by the COVID-19 pandemic. The uncertainty is high in relation to which projects will be completed, put on hold or, in worst case, cancelled. Several drilling campaigns are already confirmed to be cancelled, and more are expected to follow. The Subsea/Renewables vessel market which normally prepares for its busiest season from spring, has also as expected been quiet in the first quarter. The abundance of long-term opportunities continue, however the market norm, where obtainable short term spring/summer opportunities are fixed towards the end of the first quarter, now finds itself in a state where a majority of these contract decisions are delayed due to COVID-19. This results in a downward spiral where owners are underbidding each other towards unsustainable rate levels as time passes without firm backlog ahead. The outlook for 2020 has in short changed from partly positive to negative for the next year, with oversupply of vessels in all segments and regions

  6. I seem to recall Robotti had liquidation value for TDW closer to $15 ?
    He bought in recent q as well

    • That may well be. My reasons for a different valuation don’t necessarily
      mean that I am right and Robotti is wrong–just that I can learn from my analysis
      to make better decisions. I can trace my correct and faulty thinking.

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