21 December 2009

TDW: Look Ahead to December 2009 Quarterly Results

Tidewater (NYSE: TDW) earned $1.90 per share in the second quarter of fiscal 2010, which ended 30 September 2009, up from $1.85 in the same quarter of last year.  The recent quarter included a $34.4 million favorable resolution to tax litigation; earnings would have been $0.66 less, or $1.24, without the tax benefit.

In October, we examined Tidewater's Income Statement for the September quarter and compared the entries on each line to our "look-ahead" estimates.  We later performed a financial gauge analysis of Tidewater, which determined that the GCFR Overall gauge fell from 59 to 51 of the 100 possible points.

We have now modeled Tidewater's Income Statement for the quarter that will end on 31 December 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data the company will announce in late January or early February 2010.  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 Tidewater and the business environment in which it is currently operating.

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 serviced drillers in the Gulf of Mexico

The company still works in its home region, but activities outside the U.S. are now much more important to Tidewater's bottom line.  International operations, often involving large global and national energy companies, were responsible for 89 percent of the company's revenue in fiscal 2009.

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.

Energy prices surged through the first half of 2008.  The price of crude oil exceeded $140 per barrel at its peak.  The global economy then stalled, and speculators exited the market.  Crude oil plunged below $40 per barrel by the end of last year, but the price rebounded above $70 in 2009.  The higher price has been attributed to optimism about the economy and fears of a weaker dollar, and greater compliance with output quotas.  Natural gas prices also soared and crashed last year, but spot prices haven't had much of a rebound.

When expensive offshore production becomes less profitable, the demand for maritime support services naturally falls.  At Tidewater, the reduced demand is reflected in the company's worldwide fleet utilization rate, which fell from 75.8 percent in the September 2008 quarter to 71.3 percent in the September 2009 quarter.  The utilization rate for U.S. vessels fell to 37.7 percent from 61.4 percent.

However, Tidewater's average vessel day rate has been relatively stable, perhaps because the company now has greater numbers of modern, more productive vessels.

For many years, Tidewater has been steadily expanding and modernizing its fleet.  According to a recent presentation, the company added 31 new vessels during the last 18 months and it had 38 other vessels under construction.

Industry-wide, the number of new vessels, many ordered prior to the current market downturn, being delivered could be a concern.  While this might be a greater worry for shipbuilders, the risk to vessel owners is that fleet sizes will expand beyond demand and, therefore, depress the utilization and leasing rates.  This concern in the energy industry is amplified when low oil and gas prices reduce drilling activity.

Tidewater responds to periods of weak demand by "stacking" vessels to reduce operating costs.  The company also moves its assets from slower to busier regions.

Investors are also evaluating the robustness of Tidewater's Balance Sheet and Cash Flow to determine whether the company can sustain the capital expenditures required by its construction commitments.  Tidewater management does not appear to share this concern.  The company was optimistic enough last year to raise the dividend by 67 percent.  In addition, the company's board authorized $200 million of share repurchases.

We're now ready to look specifically at the current quarter.

Tidewater provides neither Revenue, nor Income, guidance.  However, limited cost expectations for the December quarter were discussed during the 29 October 2009 conference call with financial analysts

Now turning to guidance. We expect operating costs for the December quarter - that’s our third fiscal quarter - to be $155 million, plus or minus 2%. As discussed, we expect additional OpEx associated with eight expected new vessel deliveries. In addition, we expect some moderation in both stacking activity and R& M costs in the December and March quarters. Perhaps stating the obvious, there’s no assumption in regards to change in exchange rates in our guidance.

We currently believe that vessel cash operating margin in the December quarter will again be in the area of 46 to 47% of vessel revenue.

While we still believe margins will improve at the back end of fiscal 2010, we are more pessimistic regarding the remainder of the year than we were three months ago. In particular, it’s tough for us to see a scenario where average margins for the entire fiscal year will get back to 50%. In time, however, with an eventual recovery in the markets and the continued revitalization of our fleet, we see great opportunity for margin and earnings expansion.

[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 bring down the utilization rate.

In the December quarter, the number of new vessels will increase, but overall utilization rates are expected to fall.  Considering the guidance above and these circumstances, we are expecting Revenue to fall about 2 percent from last quarter, to $290 million.  Our estimate is 20 percent less than Revenue of $362 million in the robust December 2008 quarter.

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 $155 million.  Our guesstimate for Costs of Other Marine Revenues is $5 million, which results in a projected CGS of $160 million.  Since this amount is 55.2 percent of our $290 million Revenue estimate, we are estimating a Gross Margin of 44.8 percent.

The Gross Margin was 52.3 percent in the December 2008 quarter.

Depreciation has been a little over $30 million per quarter for the last couple of years.  We are assuming a $32 million expense for the December quarter. 

We are also using an estimate of $35 million for SG&A expenses.  This figure is consistent with past results.

Our model does not include any provisions for special charges, such as impairments, in the December quarter.

If the estimates above are accurate, Tidewater will attain an Operating Income, as we define it, of $63 million in the quarter.  Due mostly to lower Revenues, this would be a 50 percent decrease relative to Operating Income in the year-earlier quarter.

For gains due to asset sales, which Tidewater classifies as an operating item, we are using the recent average of $6 million.  We are also assuming Net Interest income of $5 million.  These figures would lift pretax income to $74 million.

If the effective income tax rate is 18 percent, Net Income will be $61 million (about $1.18 per share).  This is 48 percent below the amount earned in the December 2008 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.

Note:  Tradingcharts.com is the source for the historical charts of crude oil and natural gas futures.

Full disclosure: Long TDW at time of writing.

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