29 September 2010

TDW: Look Ahead to September 2010 Quarterly Results

This post describes our model of Tidewater's (NYSE: TDW) Income Statement for the second quarter of fiscal 2011, which will end on 30 September 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 results.  The offshore drilling moratorium following the disaster will affect Tidewater's business in the Gulf of Mexico; however, this region is a relatively small part of Tidewater's worldwide operations.

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.

The company's Market Value is currently around $2.3 billion.

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.

The offshore segment of the energy industry tends to experience cyclical highs and lows, as fluctuating economic conditions and industry changes cause the supply and demand for energy products to vary.  Energy companies adjust their investments in production and development in response to these oscillations.   Offshore activity is currently thought to be near the low point of its cycle, although this remains to be proven.  The situation in the Gulf of Mexico has also been a negative factor.

The current 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.

The number of new vessels being produced could add to oversupply unless older vessels are  scrapped or "stacked."   A company such as Tidewater also has the option to move 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 last year.  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.   Revenue from business in Venezuela was $61.6 million in fiscal 2009, 4 percent of overall revenue.

Tidewater earned $0.77 per diluted share on a GAAP basis in fiscal 2011's first quarter, which ended on 30 June 2010.  Earnings per share were 10.5 percent less than the $0.86 Tidewater made in the same quarter of last year, when the company's results were depressed by a $48.6 million ($0.93 per share) charge related to difficulties in Venezuela.

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

Tidewater management updated its guidance for the quarter and fiscal 2011 during the 5 August 2010 conference call with financial analysts.  Readers are encouraged to read the full transcript, but some excerpts follow to illustrate the type of information available.

"the contribution from newer vessels will continue to be a very large percentage of vessel revenues and vessel level cash operating margin as we continue to take delivery of new vessels, on the one hand, and continue to stack and dispose of older vessels, on the other hand."

"we still expect positive quarter-over-quarter revenue progression for remaining three quarters of fiscal 2011. The second quarter should be a bit better than the third
[sic?] quarter; the third quarter should be a bit better than the second quarter; and so on. Based on what we know today, we still believe that average quarterly vessel revenue for fiscal 2011 will be plus or minus $275 million."

"new deliveries and the docking of large AHTS vessels will put pressure on vessel operating costs over the next two quarters."

"we also expect to take a charge in the second quarter, in connection with a UK based, multi-employer pension plan. We still do not have a final assessment from the trustee on this, nor do we have a good basis to update our previous guesstimate of $6 million to $7 million. Nonetheless, when the assessment is finalized, we will take a charge that will be included in the crew cost line item within the detail behind vessel operating costs."

"we expect vessel operating expenses to be $172 million to $174 million in the September quarter, decrease to $156 million to $158 million in the December quarter, and then somewhat moderate in the March quarter. The expected vessel cash operating margin will follow a similar pattern, with a trough in the second quarter in the 35% to 37% range, somewhat rebounding to the 42% to 44% range in the December quarter, and then finishing the year, we hope, a bit better than that."

"To wrap up guidance, we expect another good quarter in gains on dispositions, net in the second quarter — likely at, or better than, gains on dispositions realized in the June quarter. Finally, for modeling purposes, recall that our best estimate for fiscal 2011’s effective tax rate is 18.5%."
[emphasis added]
As the industry looks forward to a cyclical recovery, Tidewater's fleet modernization should lead to modest Revenue growth.  Revenue in the September quarter should be higher than June's $262.5 million, but the $275 million average mentioned in the guidance seems like a stretch.  Our specific Revenue target is $270 million, which would be 9 percent less than September 2009's $295.5 million.

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 $172 million to $174 million.  We'll take the midpoint of this range and add $2 million for the Costs of Other Marine Revenues, which yields a projected CGS of $175 million.  Since this amount is 64.8 percent of the $270 million Revenue target, we are estimating a Gross Margin of 35.2 percent, down from 46.4 percent in the September 2009 quarter.

Depreciation has been between $30 million and $35 million per quarter for the last several years, with amounts near the higher end of the range more recently.  We are assuming a $34 million expense for the latest quarter. 

We are also using an estimate of $35 million for Sales, General, and Administrative 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 found to be accurate, Operating Income, as we define it, in the quarter will equal $26 million.  Due to lower Revenue and a less lucrative margin, this would be 61 percent less than Operating Income in the year-earlier quarter.

For gains due to asset sales, which Tidewater classifies as an operating item, we are using a typical $6 million.  We are also assuming Net Interest income of $4 million.  These figures would lift pretax income to $36 million.

If the effective income tax rate is 18.5 percent, Net Income will be $29.3 million (about $0.57 per share).  This is 70 percent below the amount earned in the September 2009 quarter.

Please click here to see a 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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