Tidewater Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Tidewater Inc. is a global provider of offshore energy services, primarily focused on providing marine support and transportation solutions to the offshore oil and gas industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Tidewater operates a large fleet of offshore support vessels serving oil and gas producers in diverse geographies. Their core services can be broadly categorized into:

  • Vessel Services: This encompasses providing various types of marine support vessels, including anchor handling tug supply (AHTS) vessels, platform supply vessels (PSVs), crew vessels, and other specialized vessels, for offshore drilling and production activities.
  • Marine Support and Transportation Solutions: These services include transporting supplies and equipment to offshore platforms, anchoring and moving rigs, and providing other related marine support services.

Industry Trends and Competitive Landscape:

  • Cyclicality: The offshore energy services industry is highly cyclical, influenced by oil and gas prices, exploration and production spending, and the number of active rigs. Recent years have seen a sharp rebound in oil prices and increased demand for offshore operations after a period of reduced spending following the 2014-2016 downturn.
  • Fragmented Market: The offshore support vessel industry is fragmented with numerous players, including larger publicly traded companies and smaller regional players. Competition is intense, particularly during times of lower demand.
  • Growing Demand: With the rebound in oil and gas prices, there is an increasing focus on deepwater and ultra-deepwater exploration and production, which requires more sophisticated vessels like the high-end platform supply vessels. The oil and gas industry has also had to make massive investments in energy transition fuels, opening new markets for companies that can service these areas.
  • Increased Rig Demand: As of the most recent quarter 10-Q, the fleet utilization continued to improve to 86%, up from 79% at the end of the prior quarter and above 80% in the previous year.

What Makes Tidewater Different?

  • Global Footprint: Tidewater has one of the largest and most geographically diverse fleets of offshore support vessels, enabling it to serve clients across various international markets. This extensive network reduces their dependence on individual regional economics, though also exposing them to a variety of issues that could hurt profits.
  • Fleet Modernization: Tidewater has focused on renewing and modernizing its fleet, with modern vessels capable of handling deeper water and more complex operations. This gives it an edge in the current market, where sophisticated vessels are favored by the current producers.
  • Focus on High Value Vessels As discussed in the latest earnings call, utilization on PSVs continue to be extremely high, while they see a lot more opportunity and demand for larger AHTSs. They are primarily adding these types of vessels. They have a small fleet of low-complexity vessels, and have no interest in expanding in that space.

Financial Performance Analysis The discussion below heavily references tidewater’s results from 2023 and 2022, from the Q1 2024 and the prior quarters to evaluate its performance.

  • Revenue Growth: The company has shown solid revenue growth in recent quarters, driven by improved vessel utilization and higher day rates. In its latest quarter of 2024, they saw 28% revenue increase YoY, attributed to increased day rates and the higher utilization. For fiscal year 2023 they grew revenues by 44% YoY, which shows a sharp increase in demand for their services.
  • Improving Profitability: Gross margins have recovered significantly from previous years, due to the increase in vessel utilization, pricing power, and cost management initiatives. Operating income has improved substantially. They’ve seen an increase in total vessel revenue of 27% YoY in its most recent report.
  • ROIC: ROIC has improved significantly in recent quarters, indicating the company’s effectiveness at generating profits from invested capital. The company is managing to increase its returns on capital, which is a sign of improving quality, and value creation.
  • Liquidity and Leverage: A large focus has been placed on managing its financial health and ensuring liquidity. Net debt has been reduced by $19 million during 2024’s first quarter and $71.1 million YoY.
  • Cash Flow: The company has focused on converting income into cash flow and for Q1 2024, it generated 102.9 million in cash from operations.

Moat Rating: 3/5

Tidewater’s moat rating is a moderate 3 out of 5. Here’s why:

  • Moderate Switching Costs: Some of Tidewater’s customers may have high switching costs due to the operational complexity of transferring their support and logistics operations to another firm. In general, this means that they are unlikely to switch to a competitor unless there is significant pricing differences and/or service degradation. For customers with high reliance and consistent integration, they create a stable source of business and pricing power for Tidewater.
  • Network Effects: In many offshore locations, the presence of other companies in the industry and the availability of certain infrastructure can have a network effect. Once a large amount of players rely on a certain operator for vessel access, then it’s harder for other operators to establish the same foothold in the given location. It is easier for existing operators to expand their client base since they already have the required permits, employees, local knowledge and expertise to work in the area.
  • Barriers to Entry: The offshore vessel market requires specialized vessels, skilled labor, and access to capital, which creates significant barriers to entry. This barrier to entry is reduced for companies who only compete for low-complexity operations, or companies that have the required financial and logistical capabilities to compete in the higher-complexity market and can thus act as a competitive force to Tidewater, if they focus on gaining market share.
  • Evolving Moats: Tidewater’s moat is not static-instead, its strength depends on new energy industry trends and the need for specialized and sophisticated vessels. It’s more of a “wide” moat if they can focus on these trends early and implement strategies in order to meet the new demand, but they also must be fast and accurate in predicting the right vessel types, client requirements and locations. If the company fails in its strategies, or if a competitor can duplicate and outperform on all factors, its moat can shrink to a “narrow” or “no” moat.

Risks to the Moat and Business Resilience:

  • Oil and Gas Price Volatility: The company’s earnings are highly sensitive to oil and gas price fluctuations, which can impact their customer’s capital spending and demand for offshore services. The recent increase in oil and gas prices has benefited Tidewater, a severe market downturn would heavily affect them, again.
  • Competition: Intense price competition could pressure vessel day rates and profitability. This would lead to decreased ROIC, fewer investments, and more risk to shareholders.
  • Technological Disruption: Innovations in drilling and production technology, and a move to greener energy solutions, could reduce the need for some of Tidewater’s vessels. Failing to embrace new technologies and/or client requirements can lead to an erosion of the moat.
  • Geopolitical Risks: The offshore oil and gas industry is subject to geopolitical risk, including political instability, trade disputes, and sanctions in regions where it operates. The most recent quarterly earnings show that the effects from the war in Ukraine and a strong dollar are having a material effect on the company’s profits, and this has to be taken into account when measuring the risks faced by the company.
  • Operational Challenges: Accidents or environmental incidents involving their vessels may lead to reputational damage, financial losses, and regulatory penalties. The company has many operations abroad, including dangerous locations, and may require very high operating costs, particularly on older vessels that are maintained to a “reasonable” level.
  • New Regulations: The company operates in a very global marketplace with various laws, regulations and procedures in every single country. The company must follow very complex regulations in order to continue to perform their services in certain locations. It is important for investors to know that new rules, laws, regulations or procedures from governing authorities in these countries may affect company profits.

Understandability Rating: 3/5

Tidewater’s business is moderately complex, rating a 3 out of 5 for understandability. It primarily consists of:

  • Clear Core Operations: Its main operations are clearly defined as providing vessels for offshore operations and support. However, understanding the specifics of different vessel types and their roles may require more expertise.
  • Cyclical Industry: The company operates in a cyclical industry which requires analysis of macro-economic effects and long term trends, which may make it harder to project future performance. It is important to understand these cycles in order to successfully invest in the company.
  • Accounting Complexity: The accounting for the company is not as straightforward as other businesses due to depreciation, write-offs of assets, and the complexity of asset acquisitions and sales in many different countries. The effects of foreign exchange rates also adds more layers of complexity.

Balance Sheet Health: 4/5

Tidewater’s balance sheet indicates a generally healthy financial position. Key points include:

  • Improved Liquidity: Cash and cash equivalents have increased as a result of higher operational profits and reduced debt. Net debt has been reduced by $71.1 million YoY.
  • Increased Equity: Total equity has increased as a result of higher profits and improved operations.
  • Reduced Debt: Total debt levels have declined slightly due to a reduction in senior notes and term debt.
  • Current Ratio: The company has a strong current ratio of greater than 2, implying they have enough current assets to cover short-term liabilities.
    • It has an adequate amount of cash and cash equivalents that can be deployed for future acquisitions or strategic investments.

Recent Concerns and Management Response:

  • Legacy Issues: Tidewater is undergoing a fleet renewal and is moving away from the previous ownership that has previously managed the fleet. They are dealing with some legacy issues like higher maintenance costs, which may affect operations negatively in the short term, but should lead to better operations in the long run.
  • Dilutive Acquisitions: The company has been buying up other companies recently, and issuing shares in that process. The company management has emphasized that the acquisitions were well-priced, and that they see a lot of potential in the acquired companies.
  • Inflation and Market Conditions: Tidewater’s management expects a volatile market for the upcoming years, and have explicitly mentioned how inflation, higher wages and prices for their inputs may materially affect their profitability. They have said that they are keeping a close eye on all possible risks and implementing strategies to deal with these headwinds.