20 June 2010

TDW: Look Ahead to June 2010 Quarterly Results

This post describes our model of Tidewater's (NYSE: TDW) Income Statement for the first quarter of fiscal 2011, which will end on 30 June 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 in exploration, field development, and production.  Headquartered in New Orleans for more than 50 years, Tidewater first serviced drillers in the Gulf of Mexico

A Tidewater vessel, the Damon B. Bankston, was on the scene at the Deepwater Horizon when the rig failed with tragic and wide-reaching results.  The offshore drilling moratorium following the disaster will be a negative for Tidewater's business in the Gulf of Mexico; however, this region is a relatively small part of Tidewater's business.  If cutbacks in deep-water drilling become permanent, rates for using the associated vessels would presumably decline.

In fiscal 2010, Tidewater earned $259 million ($5.02 per share) on Revenue of $1.2 billion.  These figures were down from earnings of $407 million ($7.89 per share) on Revenue of $1.4 billion in fiscal 2009.

For financial reporting purposes, Tidewater's business is divided in U.S. and International segments.  In fiscal 2010, the International segment provided 92 percent of total vessel revenues and 96 percent of vessel operating profit.

Tidewater is in the midst of a multi-year effort to expand and modernize its fleet.  According to the 10-K, the company is presently committed to acquire five vessels and to build 31 other vessels for a total cost of $742 million.  Construction progress payments of $272 million have already been made.

Weakness in the worldwide economy has caused energy companies to trim capital investments, including spending for offshore exploration and development.  The resulting reduced demand for marine support is reflected in lower utilization percentages for many classes of Tidewater's vessels, both internationally and in the U.S.  Overall, the utilization rate for the Tidewater fleet fell from 73.9 percent in fiscal 2009 to 65.9 percent in fiscal 2010.  Deep-water vessels had the highest utilization rates in both years.  The fleet modernization helped Tidewater keep its average day rate stable in this challenging environment.

In this environment, number of new vessels being produced could add to oversupply.

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 in 2009.  In April 2009, Petroleos de Venezuela, S.A., seized 11 Tidewater vessels and other assets in the Lake Maracaibo region of Venezuela.  In July 2009, Petrosucre, S.A., a subsidiary of PDVSA, took four additional Tidewater vessels.  

Tidewater’s revenue from its business in Venezuela was $61.6 million in fiscal 2009, 4 percent of overall revenue.

in fiscal 2010's fourth quarter, which ended 31 March 2010, Tidewater earned $1.10 per diluted share, versus $2.13 per share in the same quarter of 2009.  Special items added about $0.06 per share to earnings in the more recent quarter.

We're now ready to look ahead to Tidewater's results for the June 2010 quarter.

Tidewater management provided some guidance for the quarter and fiscal 2011 during the 20 May 2010 conference call with financial analysts.

As a general matter, the contribution from the newer vessels will continue to be a large and growing percentage of revenues and vessel level cash operating margin

we expect that quarterly vessel revenue will average plus or minus $275 million in fiscal 2011.

In regards to operating expenses, we’re coming up on the first special survey for four of our VS 486 anchor handling and towing supply vessels in fiscal 2011. Based on the first such docking of a sister ship, which was done in 2Q 2010, these dry docks are expected to cost $3.5 million to $4 million each, and result in lost revenue of plus or minus 50 days, or on average, $2 million to $2.5 million each. At present, we expect one 486 docking in the June quarter, two 486 dockings in the September quarter and one 486 docking in the March quarter.

So based on our current sense of additions to and subtractions from the active fleet, the schedule for large dockings, and known unusual items, we expect operating expenses to be plus or minus $155 million in the June quarter and to increase to plus or minus $165 million in the September quarter before then moderating in the second half of the year.

Absent a material rebound in rates and/or utilization or a step-up in vessel additions, we see vessel level cash operating margins averaging 43% to 44% for fiscal 2011. Due to the 486 dockings and the referenced pension charge, the September quarter should be the trough for the year in terms of vessel level cash operating margins at plus or minus 40%.

for modeling purposes we estimate our effective tax rate for fiscal 2011 to be approximately 16%.

In regards to dispositions, we hope to maintain the recent pace of 10 to 15 vessels per quarter. “Gains on asset dispositions, net” will of course be volatile, but we are off to a good start in the June quarter, having already recognized plus-$5 million of gains since the close of the March quarter.

[emphasis added]

Fiscal 2011 is expected to start slow but improve as new vessels become available, maintenance is performed and completed, and offshore activity builds from its current trough.

A wild card is the effect of the Deepwater Horizon disaster.

Given this scenario, vessel revenue in the June quarter should be below the $275 million projected average for the year.  Any increase from Revenue of $260 million in March will probably be modest.  Our Revenue target is $266 million, which would be 19 percent less than the $327 million of Revenue in the June 2009 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.  We'll take the midpoint of this range and add $4 million for the Costs of Other Marine Revenues, which yields a projected CGS of $159 million.  Since this amount is 59.8 percent of the $266 million Revenue target, we are estimating a Gross Margin of 40.2 percent.

The Gross Margin was 48.5 percent in the June 2009 quarter.

Depreciation has been a little over $30 million per quarter for the last couple of years.  We are assuming a $33 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 $38 million in the quarter.  Due to lower Revenue and a less lucrative margin, this would be a 13 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 a greater-than-normal $9 million.  We are also assuming Net Interest income of $4.5 million.  These figures would lift pretax income to $51.5 million.

If the effective income tax rate is 16 percent, Net Income will be $43.3 million (about $0.84 per share).  This is 3 percent below the amount earned in the June 2009 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: Two images above were included in the presentation given by Joseph M. Bennett, Tidewater Executive Vice President and Chief Investor Relations Officer, gave at the RBC Capital Markets Global Energy and Power Conference on 8 June 2010.

Full disclosure: Long TDW at time of writing.

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