15 September 2007

TDW: Looking ahead to September's Results

The market downturn has pared the earlier impressive gains of oil services stocks, including our favorite Tidewater. Energy shares, in general, are hurt by the fear that a slowing economy will ultimately pare demand for oil and gas. This is in spite of the fact that crude oil prices are at, or near, historic highs.

We noted some specific concerns about Tidewater's June quarter when we last analyzed the company. Our Overall Gauge for Tidewater dropped to 45 points from a more robust 61 points after the March quarter. It's not that Tidewater had a bad period -- just the opposite, really -- but the pace of revenue growth slowed and expenses were higher than expected. In addition, the then-rising stock price (the decline began in the latter half of July) weighed heavily on our valuation metrics.

Some of the higher expenses in the June quarter might have been the result of non-recurring costs that don't have long-term significance. We'll be able to assess this when the September results are published.

Revenue started to surge at Tidewater in late 2004, after a couple years of flat (or declining) performance. The growth peak was in June 2006, when quarterly revenues were 40 percent greater than the year-earlier period. By comparison, revenues in the June 2007 quarter were just 13 percent greater than in June 2006.

We will view similar revenue growth, 13 percent, in the September quarter as good. Our specific prediction for the September 2007 quarter is $311 million, compared to $274 million in the earlier period.

Tidewater's gross margin increased steadily, from about 35 percent to almost 55 percent of revenue, until falling back to 51 percent in the June quarter. The modernization of the Tidewater fleet and their growing international presence provides good reasons to be optimistic about the gross margin. We're going to look for a rebound to 53 percent for the September quarter. Given our revenue estimate, we're looking for a Cost of Goods Sold of 0.47* $311 million = $146 million.

Depreciation has been between 10 and 11 percent of revenue in recent quarters and declining. We'll assume the lower value and forecast a Depreciation expense of 0.1 * $311 million = $31 million for September. Similarly, if trends continue, SG&A expense should be about 9 percent of revenue. This equates to $28 million.

As a result, operating income of $106 million seems attainable. If we guess an additional $10 million in income from asset sales and interest, and a 21 percent income tax rate, our estimate for net income become $91 million. (Note that gains on asset sales were abnormally high in September 2006, which makes comparisons unfavorable.)


Sept 2007
Sept 2006

Op expenses

CGS (146)

Depreciation (31)

SG&A (28)
Op income

Other income

Asset sales

Interest, etc.
Pretax income

Income tax

Net income



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