Posted on November 18, 2024
Offshore support vessel (OSV) owner Tidewater announced its third quarter results on Thursday afternoon in New York. The market hated the news – the shares were down 12 per cent on Friday to close at US$56.11, a 15-month low.
If you bought Tidewater stock at any time since early July 2023, you have lost money, not that this concerns the company’s top management. CEO Quintin Kneen sold around US$70 million of stock earlier this year in several waves, when the shares briefly peaked at over US$100, and many of his senior managers joined him in dumping their own shares in that brief peak.
As we pointed out in June, this insider selling was perhaps “the ultimate red flag,” and so it has proved.
Bad buybacks waste cash
Worse, Tidewater has pursued a strategy of share buybacks at prices far higher than the current stock price. It announced that it repurchased 189,738 of its own shares since the end of the second quarter of 2024 through the end of October for US$15 million at an average price of $79.06 per share, 30 per cent more than they are worth today.
“Buy high, sell low” has been the speciality of Tidewater in its buyback programme, as the company has spent US$75 million on purchasing its own shares since the start of the year, all at levels far above the current stock price. This is exactly the opposite of the strategy employed by Mr Kneen himself, but it boosts his earnings per share metrics, and probably his bonus.
One wonders if spending US$75 million on dividends might have been more beneficial for the shareholders, or if it had been invested in newbuilds, given that the company’s fleet now has an average age of over 12 years?
First the good news
The press release was quick to highlight the positives. Tidewater reported over one US$1 billion in revenue for the first nine months of this year, and US$340 million in revenue for the quarter ending on September 30, up US$1 million from the preceding quarter.
Tidewater’s net income for the period from January to end September 2024 was US$143.8 million, whilst it made US$46.4 million for the last quarter, compared with net income of US$26.2 million for the same three months in 2023. Cash flow from operations for the first nine months of this year was US$182.5 million, the best performance Tidewater has seen in eight years. It continued to pay down its long-term debt to below US$600 million at the end of the quarter.
Mr Kneen commented in the announcement that the company achieved a gross margin of 47.2 per cent, and that the company’s consolidated average day rate for its vessels was up over five per cent to US$22,275 per vessel per day.
“In particular,” he continued, “the average day rate and average leading-edge day rates in our large platform supply vessel (PSVs) and anchor handler fleets continued to show sequential quarterly improvement.”
This is all very positive, and it shows the company delivering at levels not seen since the last boom in 2014. Indeed, Tidewater’s actual realised average day rate now is more than double the realised day rate at the beginning of 2022, when the offshore vessel recovery began.
Lower utilisation across the board
The CEO then highlighted the one of the reasons the market hammered the stock. Unfortunately, Tidewater’s utilisation “declined in all of our geographic segments and is principally related to project start-up delays, but also due to higher-than-expected idle time between contracts and days in drydock.”
That sounds like a series of one-off problems that should not dent future performance, right? Nothing to worry about? Get the ships out of dock and all will be well?
Third quarter 2023 results fall was quickly reversed
We have seen similar market over-reactions before. When the company reported its third quarter 2023 results in November, the market was disappointed, and Tidewater’s shares fell 14 per cent to US$60 per share. More the fool those who sold then, however.
A few months later, investors were ecstatic with the fourth quarter 2023 results. The shares surged 14 per cent on a single day in response, to over US$80 apiece when higher profits were announced on March 1, 2024, which pushed the company’s market capitalisation to over US$4 billion. Thereafter, they continued to rise to an all-time high of over US$107 in early May. At that point, the prescient Mr Kneen bailed.
Investors and day traders are fickle, markets can often over-correct, and stock prices can be highly volatile, especially for a company tied to oil and gas prices.
Fortress Tidewater
We should not forget that Tidewater is the leading OSV operator, with a fleet of 192 PSVs and anchor handling tug supply vessels (AHTS) amongst its total fleet of 213 ships, leaving rivals Edison Chouest, with its fleet of 122 PSV and AHTS, and Bourbon, with 105, far in its wake. It has wiped the floor with its competitors in the last three years.
Solstad has been gutted by the loss of its PSVs to Tidewater, Siem Offshore split into two after an acrimonious bust up between its shareholders, Hornbeck has failed to hold an IPO, and Bourbon remains tied up in a lengthy and complex restructuring.
Tidewater beat Tesla!
Since the end of 2021, despite the company’s recent troubles, Tidewater shares have delivered incredible returns, rising from US$10.71 on December 31, 2021, to US$56.11 at the time of writing, outperforming Tesla and all the major offshore drilling companies in that period.
Its own words in its new investor presentation this month, Tidewater has “meticulously high-graded its fleet by focusing on high-quality assets, large vessels routinely in high demand and value accretive acquisitions” using the purchase of 50 vessels from Swire Pacific Offshore at rock bottom prices in early 2022, and of 37 PSVs from Solstad Offshore in mid-2023. This fortified its dominant position as the largest and most successful OSV player in the world.
What we dubbed Tidewater’s “Pac-Man strategy” of fleet acquisitions has proved remarkably successful. And it may not be over yet, either. There’s more fruit in the maze potentially still available for Tidewater to gobble up.
Playing Pac-Man in Brazil?
In Brazil, sources report that the CBO Group, with its fleet of 45 medium and large OSVs working in the domestic market there, is being touted for sale, and that Tidewater is a possible buyer!
CBO’s fleet includes 23 PSVs and 13 large anchor handlers, following its successful acquisition of Rimorchiatori Riuniti’s anchor handling fleet in 2021, and it is the largest local OSV operator in the country. Despite this, CBO lost US$10.7 million in the first half of the year (results here) and is burdened with US$716 million of debt. We suspect that CBO’s debt load might make it hard for Tidewater to swallow.
Wilson Sons was finally taken over by container shipping giant Mediterranean Shipping Company (MSC) last month after a protracted period of negotiations. MSC bought the company not for its half share in the PSVs, but for its container terminals, primarily the Rio Grande and Salvador terminals as well as the Santo André Logistics Centre.
Rumours abound that at the right price, MSC will sell off its half in the WSUT joint venture when the deal finally closes in 2025.
Tidewater is the world’s largest PSV operator, but it has a very limited footprint in Brazil, which is the one market where it could expand without fear of anti-trust rules slowing or obstructing an acquisition.
Finally, for a hungry Pac-Man in Houston, Maersk Supply Service now sits as an orphan business in Brazil. As of November 1, 22 vessels from Maersk Supply Service were acquired by DOF Group in Norway.
However, not included in this transaction was Maersk Supply Service’s operations in Brazil, presumably for regulatory reasons. Maersk owns and operates a fleet eight AHTS and PSVs there, which makes no long-term strategic sense for Maersk and would make a bite-size morsel for Tidewater, especially coming from a well-managed company like Maersk.
Any of these hypothetical and unconfirmed Brazilian transactions would have the potential to create further buzz about Tidewater’s prospects, and a potential boost to earnings, if they were to occur.
Flashing amber for uncertainty
Unfortunately, Mr Kneen had some additional bad news couched in very diplomatic language, buried in the press release.
He commented that “the visibility into the continued pace of growth in offshore activity throughout 2025 is more limited… The outlook on the timing of the growth in offshore vessel activity has become uncertain recently due to concerns around slower acceleration in oil demand driven by lower-than-expected growth in China and geopolitical events as well as the growth in non-OPEC oil supply.”
After two years, is everything going to fall apart? Does the arrival into the OSV business of wealthy Greek owners like Evangelos Marinakis of Capital Offshore, Costis Konstantakopoulos of Costamare, and John Dragnis of Goldenport herald the peak of the market?
The truth is more mundane. Let’s examine the SEC filings Tidewater made, rather than its press release. One filing contains a detailed breakdown of regional profitability, the other a detailed snapshot of the company’s utilisation, costs and revenues by vessel category.
In part two of this piece later this week, we’ll look at what this detailed data means for the future of the company and for the future of the wider OSV industry. Stay tuned!
