02 January 2011

TDW: Look Ahead to December 2010 Quarterly Results

This post describes our model of Tidewater's (NYSE: TDW) Income Statement for the third quarter of fiscal 2011, which ended on 31 December 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.  It now conducts business on a global scale.

In fiscal 2010, which ended last March, 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 $2.7 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.

Profits in the offshore segment of the energy industry have been scarcer the last couple of years.  The industry seems to oscillate between periods of high and low activity.  Energy producers calibrate their exploration and production activities to changing economic and industry conditions.  The Deepwater Horizon disaster in 2010, which led to an offshore drilling moratorium, almost certainly exacerbated the weakness during the current cycle.  (A Tidewater vessel, the Damon B. Bankston, was on the scene when the rig failed with tragic results.)

The reduced demand for marine support has been reflected in lower utilization percentages for many classes of Tidewater's vessels, both in the U.S. and internationally.  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. 

Tidewater is in the midst of an expensive, multi-year effort to expand and modernize its fleet.  On 6 October 2010, Tidewater announced it had contracted with Dubai-based Drydocks World for the construction in Indonesia of four deepwater platform supply vessels at a cost of about $100 million.  On 30 September 2010, Tidewater was committed to acquire 4 vessels and to build 26 other vessels for a total cost of $700 million.

Industry-wide, the number of new vessels being produced could add to oversupply unless older vessels are  scrapped or "stacked."   Tidewater is also adept at moving vessels from slower to busier regions, although the associated mobilization costs can be significant.

In September 2010, Tidewater announced a plan to sell $425 million of senior unsecured notes to institutional investors.  The notes, which will mature in five to twelve years after issuance, will be used for debt refinancing, capital expenditures including fleet modernization, and general corporate purposes.

Political risks have long been a characteristic of the high-stakes international energy business, and Tidewater experienced one of these perils in 2009 when 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 $0.38 per diluted share on a GAAP basis in the September-ending second quarter of fiscal 2011, down 80 percent from $1.90 in the same three months of last year.

Readers wanting to take another look at Tidewater's September 2010 quarter might wish to review our Income Statement and Financial Gauge analyses.  Because of tax matters and a charge related to a legal settlement, reported earnings were $0.19 less than our $0.57 EPS estimate.

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

Tidewater's updated its guidance for the quarter and fiscal 2011 when it last reported earnings.  Details can be found in the conference call transcript from 3 November 2010.
The company expects its Revenue to rise rather modestly in the December 2010 and March 2011 quarters.  Unless offshore activity starts to pick up, increases in revenue would be mostly due to the higher rates commanded by the newer, more capable vessels that have been added to the fleet.

In particular, Tidewater suggested its vessel revenue would be between $270 million and $275 million per quarter in the remaining two quarters of fiscal 2011.  As a point of comparison, Revenue averaged about $265 million per quarter in the first half of the fiscal year.

We didn't find any industry data to justify a deviation from the company's vessel revenue guidance for the December period.  Our specific Revenue target is $272 million, which assumes minimal "other marine revenues" to supplement vessel revenue.  Our Revenue figure is 5.1 percent less than the $286.5 million Tidewater attained in the December 2009 quarter.

Tidewater estimated vessel operating costs would be around $160 million in the December quarter, with actual figure dependent to some extent on when a particular enters dry-dock for maintenance.  We are adding $2 million to the company's estimate and assuming no additional "Costs of Other Marine Revenues."

A Cost of Goods Sold of $162 million is 59.6 percent of our $272 million Revenue target for the quarter.  This rate translates into a Gross Margin of 40.4 percent, down from 44.6 percent in the December 2009 quarter.

Depreciation was between $35 million and $36 million per quarter in the first half of the fiscal year, and we will assume slight growth to $37 million in the December quarter.

We are also using an estimate of $35 million for Sales, General, and Administrative expenses.  This figure is derived from the company's guidance, and it is consistent with earlier 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 $38 million.  Due to lower Revenue and a less lucrative margin, this would be 38 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 $7 million.  We are also assuming Net Interest income of $3 million.  These figures would lift pretax income to $48 million.

If the effective income tax rate is 24.5 percent, Net Income will be $36.2 million (about $0.71 per share).  This is about 40 percent below the amount earned in the December 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.

Full disclosure: Long TDW at time of writing.

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