Description

Introduction

Tidewater is the world’s largest OSV (Offshore Support Vessel) operator with a global fleet of 174 vessels, which provide support for all phases of offshore oil and natural gas exploration / field development / production, as well as windfarm development and maintenance. Key services include towing and anchor handling for mobile offshore drilling units, transportation of personnel & supplies, offshore construction, geotechnical surveys, and pipe / cable laying.

Previously a victim of depressed oil prices / reduced industry capex spending, Tidewater underwent Chapter 11 reorganisation in 2017. Today, Tidewater has the cleanest balance sheet of major competitors ($65m net debt) and one of the youngest and most modern fleets, making it a well-positioned play for a recovery in offshore activities as a result of a tightening supply/demand balance in the broader sector.

Swire Pacific Acquisition

In 1Q22 TDW closed the acquisition of Swire Pacific Offshore (SPO) for $190m, consisting of $42m cash and 8.1m warrants. The transaction adds significant strength to TDW’s presence in West Africa, as well as growth ambitions in Southeast Asia and the Middle East. TDW estimates the transaction will add $45m of annual cost synergies within 2 years.

SPO’s fleet consists of active 29 AHTS vessels and 21 PSVs, with the $190m acquisition cost representing a bargain compared to an estimated $441m fleet valuation by VesselsValue, with the Hong Kong seller Swire Pacific intending to shift their focus towards core investments in aviation, property, investments, and healthcare.

Tight Supply amidst Growing Demand

Aside from the expected uptick in growth for upstream EPC / drilling campaigns and renewables (offshore windfarms), the current geopolitical situation and supply/demand dynamics have pressured oil companies to figure out ways to pump more from existing production – done through well stimulation activity, enhancements to well efficiency, and other vessel-intensive projects.

In the OSV industry the key barrier to entry is access to capital, whether it be for newbuild orders or to acquire other competitors.

There are significant advantages to having a modern fleet, with many clients having age restrictions for their chartered tonnage and would not consider vessels >15 years old. Complying with local regulations, age restrictions and low emission requirements are all factors that will put increasing pressure on TDW's competitors with ageing fleets.

The existing OSV global fleet has declined 4% vs. 2017 and there is limited incoming newbuild OSVs - with >90% newbuilds halted for construction for >4 years, and >90% under construction at 2nd tier yards. Furthermore, of the 215 newbuilds registered with IMO, only 67 are “Tier 1” that will be delivered in 12-24 months, heavily offset by 430 vessels that will pass the 15-year mark in the next 2 years, suggesting the premium fleet will shrink significantly over the next few years.

Valuation

While had Tidewater has struggled to generate significant earnings / CF in recent years, the company has enormous operating leverage in a scenario where utilisation and day rates return to historical levels seen in 2014.

Westwood Energy estimates c. 75-90% utillisation will be reached across the global OSV fleet by 2024, with regions like the Middle East already at 90% utilisation. Age and quality of the ships are key factors for achieving higher utilisation, which puts TDW at a strong advantage. In 1Q22 TDW was already at 71% utilisation compared to global utilisation of 63%.

If 2014 day rates of $18.5k can be achieved with 90% utilisation, Tidewater has estimated they will generate $668m EBITDA based on 2021 Core Fleet earnings, implying <2x EV/EBITDA based on current trading valuation (adjusted for impact of warrants / options).

While the company will likely incur some near term cash outflow from synergies integration and WC ramp-up, performance is expected to pick up in 2H22 and 2023 as utilisation and day rates increase, drydock / reactivation expenses decrease, and G&A synergies are recognised from Swire Pacific acquisition, paving the way for significant dividend payments in 2023-2024.

It also is worth noting the company continues to trade at a discount to the value of the combined fleet, estimated at $1.45bn in Mar-22 by VesselsValue.

In the event of prolonged high oil prices and the need for increased offshore OSV activities, TDW has multi-bagger upside over the next few years.  

Catalyst

- Improved utilisation and day rates

- Resumption of dividend payments / buybacks