Weekly Stock Call

October 2, 2010
Current Price – US$43.97



Tidewater (TDW) impresses with its conservative approach to financial and growth management, its scale and geographic diversification, and a demonstrated commitment to return value to shareholders through distribution of free cash flow through dividends or share repurchases. The company has a stated strategy to maintain a solid balance sheet, utilize cash flow to renew its fleet, return surplus capital to shareholders and remain ready to capitalize on business expansion opportunities if the price, quality of assets and timing are right. Capital expenditures from operating cash flows at rates exceeding depreciation, maintenance of low debt levels, and ongoing payments of dividends and share repurchases validate the company’s commitment to this strategy. The primary drivers for revenues for TDW are expected future levels of supply and demand for crude oil and natural gas, and on estimates of the cost to find, develop and produce reserves. This in turn drives oil and gas exploration and development activities and the demand for support services such as those provided by Tidewater. While global recessionary conditions have throttled back demand and depressed prices, TDW earnings have remained relatively flat. However, the fundamental drivers, increased energy demand coupled with dwindling supply, suggest that demand for the company’s services will rebound strongly and that share price should recover.

Tidewater runs the world’s largest offshore support vessel fleet with 394 vessels distributed globally. The company has annual revenues of $1.2B, with 90% of its revenue derived from international deployments and 10% from U.S. operations. The primary business is the provision of marine support services to oil and gas exploration, development and production companies, drilling companies, and other offshore services companies.

 
Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Tidewater Inc. of US$54.50.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield                      24.0%
Dividend yield                  2.3%
Total return                    26.3%

 
Risks

Listed below are some of the key risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Global Economic Conditions – As the primary driver for earnings is global demand for oil and gas, prolonged recessionary conditions and subdued demand may adversely impact earnings.

Competitive Pressures – The marine support services industry is highly competitive and competes largely on price. Continued addition of new capacity might adversely impact future earnings.

Industry Consolidation and Concentration – consolidation within the company’s customer base may lead to reduction in aggregate demand for marine support services and reduce pricing power. Currently, 31% of the company’s revenues are derived from just two customers. Loss of these customers would materially impact earnings.

 
The Numbers

Share Price ($US)   43.97
Market Cap ($US B)   2.3
No. Shares (M)   52
ROE   10.7%
ROA   7.8%
P/E Ratio   9.1
Price/Sales Ratio   2.1
Price/Book Ratio   0.9
Current Ratio   2.4
Interest Coverage   45
Total Debt/Equity   12%

Analyst – David Scollon


Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

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