20 June 2009

TDW: Look Ahead to June 2009 Quarterly Results

The GCFR Overall Gauge of Tidewater Inc. (NYSE: TDW) increased from 58 to 64 points of the 100 possible points in the March 2009 quarter, which was the fourth of the company's fiscal 2009.  Our analysis report explained in some detail how this score was attained.

Revenue in the March 2009 quarter was only 3.1 percent greater than in the year-earlier period, but lower costs lifted Net Income by a robust 28.5 percent.  For the fiscal year as a whole, Revenue grew by 9.5 percent and Net Income rose 16.7 percent.

Despite the healthy financial performance, Tidewater's share price fell 33 percent from March 2008 to March 2009.  This divergence enabled the Value gauge for Tidewater to reach a perfect 25-point score.  (The share price has already rebounded 22.5 percent.)

We have now modeled Tidewater's Income Statement for the soon-to-be-concluded June 2009 quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce in late July.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we set the stage with some background information about the company and the business environment in which it operates.

Tidewater (NYSE: TDW) owns the world's largest fleet of vessels serving the global offshore energy industry

Headquartered in New Orleans for more than 50 years, Tidewater first attended to drillers in the Gulf of Mexico.  The company still works in this region, but international operations now dwarf the domestic business.  Foreign operations were responsible for 89 percent of the company's revenue in fiscal 2009.

Tidewater is proceeding along a multi-year path to expand and modernize its fleet.  The company added 17 new vessels and disposed of 47 older vessels in fiscal 2009.  Of the 409 owned or chartered vessels at the end of the fiscal year, 142 were built in 2000 or later.  As of 31 March 2009, Tidewater is obligated to purchase 46 additional new vessels at a total cost of about $992 million.  The company expects to take delivery of 26 vessels in fiscal 2010 and the remainder by July 2012.

Despite large capital expenditures, Tidewater management was optimistic enough last year about cash flows to raise the dividend by 67 percent.  In addition, the company's board authorized $200 million of share repurchases.  However, the 10-K reports that none of $200 million has, as yet, been spent.

"The company will continue to evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets."

Global economic weakness has cut worldwide consumption of crude oil and natural gas and led to lower energy prices compared to mid-2008 levels.  Since expensive offshore production is now less profitable, the demand for maritime support services is also down.  At Tidewater, the reduced demand is reflected in the company's worldwide fleet utilization rate, which fell from 74.5 percent in the March 2008 quarter to 72.1 percent in the March 2009 quarter.  However, the average day rate rose from $10,900 to $12,626.  We believe the increase is mostly attributable to the greater number of modern vessels.

When demand is down, Tidewater can "stack" vessels to reduce operating costs.  The company can also move ships from slower to busier regions.

Political risks have long been a characteristic of the high-stakes international energy business, and Tidewater experienced one of these perils earlier this year.  As described in Tidewater's 10-K, Petroleos de Venezuela, S.A., which is Venezuela's national oil company,

"took [without compensation] possession of 11 of [Tidewater's] vessels that were supporting PDVSA operations in the Lake Maracaibo region of Venezuela."

This seizure was part of the Venezuelan government's actions to take over all oil operations in Lake Maracaibo.  The confiscated vessels had been responsible for about 3 percent of Tidewater's revenue.

As a result of Maracaibo events, underwriters in London decided the insurance policies they write would no longer cover war risks, including asset expropriation, in Venezuela.

We're now ready to look ahead.

Tidewater provides neither Revenue, nor Income, guidance.  However, limited cost expectations for the June quarter were discussed during the 14 May 2009 conference call with financial analysts

" ... consistent with guidance in January, we anticipate some reversal of the positive [operating cost] trend of the past two quarters, and a quarter-over-quarter uptick in repair and maintenance expense in the June quarter. To be clear, we do not expect to return to the R&M expense levels witnessed in first half of fiscal 2009."


"On a good-forward basis, we expect operating costs for the June quarter, that is our fiscal first quarter, to be about $160 million ....  An upward trend in operating costs associated with new vessel deliveries is also factored into this guidance."


"Our current sense that vessel-level cash operating margin for the June quarter will be in the range of 49% to 51% with a deterioration in rates and utilization only being partially offset by the positive effects of new deliveries and ongoing cost-containment initiatives."

[emphasis added}

Revenue depends on the number and types of vessels Tidewater owns, the utilization of these vessels, and the amount Tidewater can charge (typically expressed in dollars per day) for leasing them.  Maintenance, weather, moving vessels between operating locations, and new vessels entering the fleet can negatively affect the utilization rate.

In the June quarter, the number of new vessels will increase, but overall utilization rates are expected to be down slightly.  In addition, Tidewater's revenue will be negatively affected by the seizure of the 11 vessels in Venezuela.

Given these circumstances, we are assuming that Revenue in the June 2009 quarter will match the $340 million of the June 2008 quarter.  We would not be surprised if the actual figure deviates from the estimate by plus or minus 5 percent.

Management's guidance, as quoted above, for Vessel Operating Costs is $160 million.  We assume that the volatile Cost of Other Marine Revenues will be $7.5 million; the combination of these figures results in a forecast for Cost of Goods Sold of $167.5 million.  The CGS estimate is 49 percent of our $340 million Revenue estimate, equating to a Gross Margin, as we define it, of 51 percent.

The Gross Margin was only 45 percent in the June 2008 quarter.

Depreciation was between $30 million to $32 million per quarter for the last couple of years, but it inched up to $33 million with new vessels entering the fleet.  We will assume a $34 million expense (10 percent of estimated Revenue) for the June quarter. 

We will assume $36 million for SG&A expenses.  This figure is consistent with past results.

It is possible the Tidewater will record impairment charges associated with the vessels, receivables, and other assets in Venezuela.  There might also be legal charges.  However, our current model for Tidewater does not include any provisions for special charges.

If our estimates are accurate, Tidewater will attain an Operating Income, as we define it, of $103 million in the quarter.  Due mostly to a better Gross Margin, this would be a 17.6 percent increase over Operating Income in the year-earlier quarter.

For gains due to asset sales, which Tidewater classifies as an operating item, we have used the recent average of $5 million.  We are also assuming Net Interest income of $5 million.  These figures would lift pre-tax income to $113 million.

If the effective income tax rate is 17.5 percent, Net Income will be $93 million (about $1.81 per share).  This is 9.5 percent above the amount earned in the June 2008 quarter.  On a per-share basis, the increase would be 10.4 percent.  Readers are reminded that we have made no provisions for charges related to the situation in Venezuela.

Please click here to see a full-sized, normalized depiction of the projected results next to Tidewater's quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Full disclosure: Long TDW at time of writing.

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