17 September 2009

TDW: Look Ahead to September 2009 Quarterly Results

The GCFR Overall Gauge of Tidewater Inc. (NYSE: TDW) slipped from 67 to 59 points of the 100 possible points in the June 2009 quarter, which was the first of fiscal 2010.  Our income statement and financial gauge analyses explained in some detail how the score was attained.

Tidewater earned $0.86 per share in the June quarter, down from $1.64 in the same period of 2008.  Earnings were $1.80 per share if we exclude a $48.6 million charge related to the seizure of Tidewater vessels in Venezuela.

Revenue in the June quarter fell by 4 percent.  The decrease was due, for the most part, to a significant decline in demand for U.S. vessels.

We have now modeled Tidewater's Income Statement for the soon-to-be-concluded September 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.  Most of the company's Revenue results from the use of these vessels by large international and national oil companies.

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.

For many years, Tidewater has been steadily expanding and modernizing its fleet.  According to a recent presentation, the company added 22 new vessels during the last five quarters and, is now waiting for 45 other vessels under construction, at an aggregate capital cost between $950 million and $1 billion.

For example, this month Tidewater agreed to purchase, for delivery in January 2010, ...

... the multi-purpose [Remotely Operated Vehicle] ROV and light construction vessel Aquanos Enabler, currently under construction at STX Europe shipyard in Brevik, Norway. The 311-foot, diesel electric vessel [...] is equipped with a 100 ton active heave compensating crane, accommodations for 69 persons, firefighting equipment (Fifi I), DP2, a moonpool and a helideck. The vessel also has the cargo capabilities to operate as a large platform supply vessel.

Tidewater believes this vessel "will provide a very attractive platform to build out our sub-sea services business. "

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.

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 74.8 percent in the June 2008 quarter to 70.7 percent in the June 2009 quarter.  However, the average day rate rose from $11,396 to $12,282.  We suspect the increase is due 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 September quarter were discussed during the 29 July 2009 conference call with financial analysts

On a go-forward basis, we expect operating expenses for the September quarter — that’s our second fiscal quarter — to be plus or minus $156 million. This guidance assumes no substantive activity in Venezuela, additional OpEx associated with new vessel deliveries, a September quarter uptick in R&M costs and approximately $2.5 million in incremental operating lease costs associated with new sales lease back financing.

In regards to R&M [Repairs and maintenance], the expectation of higher costs is primarily related to the first major dry dock which will begin in August of one of our larger AHTS [Anchor handling tug supply] vessels. Our current sense is that vessel level cash operating margins in the September quarter will moderate relative to the June quarter, and likely be in the range of 47% to 49%. Overall market conditions and further deterioration in average day rates and utilization is expected to be a factor in the September quarter, as is the expected short-term drag that ten new vessel deliveries will have on cash operating margins.

At present, we expect that R&M expense will moderate in the second half of the year and that net margins on newly delivered vessels will gradually rise. All other things being equal,fleetwide cash operating margins should trend higher in the second half of the year, and we would estimate that our cash operating margins for the full fiscal year to be in the range of 49 to 51%.

[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 September quarter, the number of new vessels will increase, but overall utilization rates are expected to be down slightly.  In addition, Tidewater's revenue, relative to last year, will be negatively affected by the situation in Venezuela.

Given these circumstances, we expect Revenue will fall about 8 percent from $347 million last year to $320 million in the September 2009 quarter.  This would be a drop of 2 percent from June 2009.

We group the "Vessel Operating Costs" and "Costs of Other Marine Revenues" reported by Tidewater and call the combination Cost of Goods Sold.  Management's guidance, as quoted above, for Vessel Operating Costs is $156 million.  Our estimate for Costs of Other Marine Revenues is $10 million, which results in a projected CGS of $166 million.  Since this amount is 51.9 percent of our $320 million Revenue estimate, our estimate for the Gross Margin is 48.1 percent.

The Gross Margin was 49.1 percent in the September 2008 quarter.

Depreciation has been a little over $30 million per quarter for the last couple of years.  We will assume a $33 million expense (10.3 percent of estimated Revenue) for the September quarter. 

We will assume $35 million for SG&A expenses.  This figure is consistent with past results.

Although it is possible the Tidewater will record impairment charges, above and beyond those reported last quarter, our model does not include any provisions for special charges in the September quarter.

If the estimates above are accurate, Tidewater will attain an Operating Income, as we define it, of $86 million in the quarter.  Due mostly to lower Revenues, this would be a 17.4 percent decrease 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 $6 million.  We are also assuming Net Interest income of $5 million.  These figures would liftpretax income to $98 million.

If the effective income tax rate is 18 percent, Net Income will be $80 million (about $1.56 per share).  This is 16 percent below the amount earned in the September 2008 quarter.

Readers are reminded that we have made no provisions for charges related to the situation in Venezuela, above and beyond those recorded in the June quarter.

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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