Description

Buy Tidewater (TDW).  This isn’t my idea.  Goober25 wrote up TDW on July 27, 2022 when the stock was $21 and now its $43.  I think its another double with 50% upside this year. 

Goober handed VIC a brilliantly timed cyclical stock, before the first pitch of the game was even thrown.  You see, TDW announced their 2Q22 results on 8/4/22 and their average vessel dayrate experienced a step change from $10,687 to $12,544.  Now some of that delta was due to the closing of Swire Pacific, but there were notable day rate increases in non-Swire geographies like Americas, Europe, etc.  And for his effort, VIC gave his idea a 2.7 Quality / 3.8 Performance rating. That’s notable since a place like VIC should be open to a deep value idea…. Just goes to show you how hated this stock/sector is. 

Truth be told, I saw the write up back in July 2022 and was like, are you kidding me?  That’s a crap business!!  So I didn’t even both to open the idea and read it.  And then fast forward to 1 month ago, my analyst comes to me with the TDW pitch and I was incredulous.    I refused to even listen… until my analyst snuck the company into my conference meeting schedule, and I spent an hour with the CEO this past week.  If you don’t want to read anything else I write, at least read this podcast:

https://yetanothervalueblog.substack.com/p/tidewaters-management-on-the-offshore

I basically had the same conversation as Andrew Walker, but 7 weeks later. 

Let me be clear about a few things.  This is still a shitty business.  This is still a cyclical business.  There are no real barriers to entry.  And yet I think there is real money to be made.  My call is simply a call on the duration of the cycle.  Nothing else.  I am not going to sit here and tell you that this time it’s different and that management has found Jesus.  I fully expect this industry to go down in flames again.  Its just a matter of time.  But, I think we are in the 2^nd inning right now.  BTW, you could say the same thing for offshore drillers, but I think that view is way more understood.  Names like RIG, NE, VAL are widely covered by sell side.  TDW has scant sell side coverage and is basically a single stock in a niche sub-sector of offshore services.

So here is the set-up.  This industry has basically been in the ice ages since 2014.  On the eve of the OPEC jihad of 2014, the industry had 20% of newbuild orderbook in an arguably already oversupplied market.  Capital was being thrown around like in the drug smuggling film American Made, and Chinese shipyards were cranking out ships like their lives depended on it.  Then demand imploded and supply increased.  Hence the 8-year ice age.  All the shipping companies went bankrupt.  Lots of Chinese shipyards went out of business / consolidated.  No one has ordered a new ship in nearly a decade.  These are assets that have 25 years lives and there isn’t much less than 8 years old.  So typical attrition is 3-4% a year.  And now demand is now increasing.  So now you have supply /demand working in reverse.  Supply ticking down as demand is going up and no new supply on the horizon.  And you know what happens when you hit max utilization on price inelastic demand?  Day rates go parabolic. 

TDW’s CEO says you need 38k dayrate to order a new ship at 14% cost of capital.  He also thinks it will take 2.5-3.0 years to get a new ship if you order it today.  Let’s assume he is lying and its more like 30k and 2 years.  What’s the cycle look like without going parabolic, just assuming a grind:

In 1Q22, TDW did $11k blended and they will exit 2022 at around $14k dayrate (they were $13,600 in 3Q22, so pretty close).  At a 11k dayrate with Swire synergies, TDW is at a $200mm EBITDA run-rate.  If you assume 1k accretion in dayrate per quarter and some utilization uplift, here are my numbers for the next 4 years:

2023: Avg dayrate $16k = $530mm EBITDA

2024: Avg dayrate $20k = $794mm EBITDA

2025: Avg dayrate $24k = $1,058mm EBITDA

2026: Avg dayrate $28k = $1,300mm EBITDA

See slide 12 in TDW slidedeck

https://s25.q4cdn.com/923634175/files/doc_presentations/2022/TDW-IR-Deck-Pareto.pdf

If you add up these 4 years, you get about $3.68mm EBITDA and FCF of around $3.3 billion.  And this does not assume a parabolic dayrate move into the 30s.  If you had a parabolic move, we could easily see 4bn+ EBITDA and then it takes 2 years to bring newbuild supply?  Either it’s a grind or its parabolic, but the money is coming and consensus numbers are way too low:

2023 = $318mm

2024 = $366mm

2025 = $444mm

So I think 2023 is year where people wake up, do the math and numbers move up.  2024 is the year where TDW returns capital via dividends and buybacks.  Their debt has covenants which preclude any capital returns until November 2023. 

Thats basically it.  There a few things that go wrong:

1. The dumbest rich guy on earth decides to build a PSV on spec with a zero WACC
2. Nuclear war would put a crimp on oil demand
3. A Deep Horizon 2.0 could put the nail in coffin for offshore
4. The world becomes one happy family and Russia, Iran and Venezuela decide to become democracies all oil sanctions lifted
5. OPEC decides that running an oil price cartel is morally wrong

Catalyst

1. TDW 4Q22 earnings on 2/27 post market
2. Street moving 2023 / 2024 numbers up
3. Capital returns in 2024