29 March 2010

TDW: Look Ahead to March 2010 Quarterly Results

This post describes our model of Tidewater's (NYSE: TDW) Income Statement for the fourth quarter of fiscal 2010, which will end on 31 March 2010.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results that the company will report.  Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about Tidewater and the business environment in which it is currently operating.

Tidewater 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
Slide 16 of TDW presentation at Sidoti Forum Mar 2010

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 supporting very large energy businesses, were responsible for 89 percent of the company's revenue in fiscal 2009.

Tidewater is in the midst of a multi-year effort to expand and modernize its fleet.  According to a presentation given at an investor forum on 24 March 2010, the company has taken delivery of 47 new vessels during the last two fiscal years.  As of 31 December 2009, Tidewater was awaiting delivery of 36 additional vessels.

Remaining capital spending commitments totaled $527 million, with $183 million of that amount due in the quarter ending 31 March 2010.

In the broader shipping industry, the number of new vessels being produced is something of a concern.  The risk is that fleet sizes will expand beyond demand and, therefore, depress vessel utilization and leasing rates.  The concern is amplified when weaker economic conditions cause a dip in energy exploration and production.
Slide 37 of TDW presentation at Sidoti Forum Mar 2010

This has already been happening in Tidewater's sector of the industry.  The company's Revenue in the December 2009 quarter was 21 percent less than in the year-earlier period.  The utilization rate for the company's worldwide fleet dropped from 74.4 percent to 63.8 percent.  The utilization rate for U.S.-based vessels slumped to only 39.5 percent.

Tidewater reduces operating costs in periods of weak demand by "stacking" or retiring vessels.  The company also moves vessels 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 to Tidewater's results for the March 2010 quarter.

Tidewater provides neither Revenue, nor Income, guidance.  However, limited cost expectations for the March quarter were discussed during the 2 February 2010 conference call with financial analysts.

Now turning to guidance, our March quarter, that's our fourth fiscal quarter should look reasonably similar to December quarter in regards to operating cost and cash operating margins. Operating costs for the March quarter should be about $147 million plus or minus 2% reflecting additional OpEx associated with nine expected new vessel deliveries along with incremental OpEx associated with the seven vessel deliveries from the December quarter.

These additional costs would be somewhat offset by another relatively light quarter in terms of R&M expense. While we stacked up few additional vessels in the southeast Asia region in early January, our expectation remains the stacking activity will moderate bit over the course of the quarter.

We currently believe that vessel level, cash operating margins in the March quarter should again be in the area of plus or minus 46% of vessel revenue, where in fact may remain for a couple of quarter with an eventual recovery of the markets and a continued revitalization of our fleet, we continue to see potential upside in operating margins and earnings.

[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.

Considering these circumstances, we are expecting Revenue in the March quarter to be about the same as, or maybe a shade less than, Revenue in the sequentially preceding December 2009 quarter.  Our specific target is $285 million, which would be 17 percent less than the $342 million of Revenue in the same quarter of the previous year.

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 $147 million, plus or minus two percent.  We'll take the midpoint of this range and add $8.7 million for the Costs of Other Marine Revenues, which yields a projected CGS of $156 million.  Since this amount is 54.6 percent of the $285 million Revenue target, we are estimating a Gross Margin of 45.4 percent.

The Gross Margin was 55.0 percent in the March 2009 quarter.

Depreciation has been a little over $30 million per quarter for the last couple of years.  We are assuming a $34 million expense for the latest quarter. 

We are also using an estimate of $36 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.

If the estimates above are accurate, Tidewater will attain an Operating Income, as we define it, of $59 million in the quarter.  Due to lower Revenue and a less lucrative margin, this would be a 51 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 $5 million.  We are also assuming Net Interest income of $4 million.  These figures would lift pretax income to $68 million.

If the effective income tax rate is 18 percent, Net Income will be $56 million (about $1.08 per share).  This is 49 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: The images above were included in the presentation Joseph M. Bennett, Tidewater Executive Vice President and Chief Investor Relations Officer, gave at the Sidoti Institutional Forum on 24 March 2010.

Full disclosure: Long TDW at time of writing.

No comments:

Post a Comment