Offshore Energy's Epic Comeback!

Remember those epic oil busts? Yeah, those were rough.

But here's the secret of the boom-bust cycle: the longer the downturn, the bigger the rebound. And after a brutal 7-year stretch (2014-2021), the offshore energy industry is poised for an epic comeback!

Think about it: the Ukraine conflict sent energy security concerns skyrocketing. Countries are scrambling for reliable sources, and guess who's sitting on a treasure trove (literally, under the ocean)? The offshore industry! We're in the early stages of a massive upcycle.

But how do you ride this wave? Look no further than the boat business, the backbone of offshore operations. And within that sector, one company stands out. 

Tidewater.

Why Tidewater? Here are 5 reasons they're the captain of this comeback crew:

1.     Masters of the Deal: Tidewater’s management has a history of scooping up good assets at cheap prices.

2.     Constrained Supply: There's a limited supply of these specialized vessels, and Tidewater's already got the fleet to meet that need.

3.     Rising Demand: Companies are spending more on offshore development. Tidewater's services are about to be in hotter demand than a lemonade stand in the desert.

4.     Day Rates on Fire: The cost of chartering these vessels is skyrocketing. With a fixed cost base, revenues convert to profits at a faster rate.

5.     Rock-Solid Financials: They're financially sound, which means, Tidewater can buy competitors if a good deal comes around, or its stock if it goes on sale.

6.     Skin in the Game: The leaders at Tidewater aren't just calling the shots, they've got their own money on the line. That means they're as motivated as we are to increase profits.

Who Is Tidewater?

Imagine a massive fleet of 221 specialized ships, crisscrossing the oceans.  These aren't your average cruise liners. Tidewater's crew consists of:

• Platform Supply Vessels (PSVs): Picture them as high-seas taxis, delivering essential personnel and equipment to offshore rigs and platforms. They're the backbone of keeping things running smoothly out there.

• Anchor Handling & Tug Supply vessels (AHTS): These are the muscle behind the mission. They expertly maneuver and anchor gigantic rigs and other structures, ensuring everything stays in place amidst the ocean's power.

And guess what? Tidewater is the world's largest operator of these bad boys, with 221 vessels under their command. They're in the maritime support game. They're headquartered in Houston, Texas, but their reach is truly global!

Masters Of The Deal

In the downturn, Tidewater’s management didn’t just sit there waiting for the sunshine.  They made three smart moves that have put the business in pole position today.

Left A Mark

In 2018, when the whole boat business was overflowing with vessels, Tidewater saw an opportunity to consolidate the market. They merged with GulfMark Offshore, a smart play that streamlined operations and saved them a ton of cash on expenses.

The Swire Steal

In 2022, Tidewater spotted a golden opportunity and acquired Swire’s fleet of 50 vessels for $190 million.  This amounts to a per-vessel cost of $3.9 million.  That's like finding a treasure chest full of pirate booty!   Today, Tidewater trades for Enterprise Value - Boat valuation of $21 million, and the value of the Swire’s fleet today is closer to $1 billion.

The Solstad Scoop

Tidewater pulled off another shockingly good deal in 2023. Solstad, needing to lighten their load, sold 37 high-specification vessels to Tidewater for $577 million.  The price paid per vessel was $16 million. 

This move further cemented Tidewater's position as the go-to company for offshore vessels.

Constrained Supply

Energy old-timers remember the days when the offshore scene was overflowing with new boats.  The next best thing to operating boats was building new boats.  Per historical filings from Tidewater, there were 450 and 540 new builds in the global order book in 2014 and 2015 respectively, and accounted for 14% and 16% of the total fleet.  Fast forward to today, and things have flipped 180 degrees!    Today, the new build number is as low as 50.

Here's why there's a ship shortage brewing:

• Building a Boat? Not Worth the Buck! Imagine dropping $60-70 million on a new vessel. Then you have to wait 2-3 years before it even hits the water!  With day rates hovering around $20-22k, the math doesn't work. Building ‘new’ just isn't profitable.

• Shipyard Shuffle: The oil bust was long.  Many shipyards closed and others simply gave up and moved on to other projects. So, even if someone wanted a new ship, there's a limited crew to build it.

• The Green Fog: Investors and banks are nervous about the future of oil and gas. Will these boats be useful in 2040? The uncertainty makes them hesitant to pour money into new vessels or finance them.

High cost of capital, low bank appetite to fund new builds, and restrictive boat economics are contributing to limiting newbuild capital.  This lack of new supply is great news for existing operators such as Tidewater.

Will Someone Bite?

While new boats are a tough sell right now, things can change fast.  A lucrative 5-year contract for a new vessel, at $45,000 per day may do it! That kind of payday could see an operator recoup 65% of their investment in just the first five years! Plus, the boat itself would still be a valuable asset, retaining 75-80% of its worth.

So, the question is: Will an E&P company (Exploration and Production) finally decide the risk of not securing a supply boat is high enough to offer a long-term contract?  As the market tightens in 2025, this may become more likely.

Demand for offshore oil and gas is rising.  Here's why:

• The whole Russia-Ukraine situation has countries scrambling to diversify their energy sources.  Securing Offshore supply is the perfect way to break free from that OPEC/Russia reliance.

• U.S. shale producers are being held accountable by their shareholders, meaning they're not likely to ramp up production dramatically. This leaves offshore as a key player in meeting future energy needs.

• After years of being on the back burner, offshore investment is finally growing.  Companies are pouring money back into this sector.Subscribe now

Petrobras, for example, is ramping up its capital spending plan over the next three years to grow production.

Why Old Boats Won't Cut It!

The risk of relying on ancient equipment in the unforgiving world of deepwater development is unpalatable.

Here's why new and improved vessels are crucial:

Distance: Offshore locations are a long way from shore. Modern boats need ample deck space to haul supplies and crew efficiently, ensuring a smooth (and safe) journey.

Tech: Keeping these operations stable requires advanced dynamic positioning systems. Think of it as a GPS on steroids, holding the boat in place like a digital anchor. Older boats often lack this crucial tech.

The Green Gauntlet: Environmental regulations are stricter than ever. New vessels are built with ESG (Environmental, Social, and Governance) compliance in mind, minimizing the risk of spills and accidents. Older boats might struggle to meet these standards.

Operations: Running outdated equipment is expensive. Fuel costs skyrocket, and frequent repairs drain resources. Modern vessels are built for efficiency, saving money, and minimizing downtime.

So, what happens when new boats are scarce? Day rates have to rise! This incentivizes companies to either build new vessels (if it becomes profitable again) or pull older ones out of retirement. But the truth is, most of those old boats are past their prime, destined for the scrap heap.

Day Rates On Fire. Here's where Tidewater's Management earns its pay! 

They've adopted a short contract strategy. Instead of locking into long-term deals, they keep their contracts flexible, typically under a year. This allows them to capitalize on rising day rates, constantly renegotiating for better deals as the market tightens.

In an upcycle, the operating leverage comes from fixed costs.  So, as day rates surge, more money flows straight to the bottom line.  Operating income is projected to double in 2024 and grow another 50% in 2025.  As management uses extra liquidity to repurchase shares, Earnings per share are projected to grow even faster.

Here's the exciting finale on why Tidewater is the ticket to ride the offshore oil and gas wave:

Financially Sound: 

Even after two recent acquisitions, their balance sheet is squeaky clean. They have minimal debt compared to their cash flow, meaning they're practically unleveraged.

If things keep rolling, Tidewater is projected to generate a whopping $11 per share in free cash flow by 2025! That's a lot of money they can use for...

Acquisition Ambitions: 

Growth by acquisition is the top priority.  But if the right deals aren't available, Tidewater won't hesitate to deploy capital into stock buybacks if the stock falls.

Leaders with Skin in the Game:

Here's the real kicker: the people running Tidewater have a lot riding on its success. Board members and top executives own a significant chunk of the company's shares. Their interests are aligned with ours.

The Big Picture:

There are two main scenarios for the future.

One: oil prices take a tumble due to some unforeseen event. In that case, Tidewater (along with the rest of the energy sector) will take a hit.

But here's the more likely scenario: A tight market will push day rates high enough to incentivize new builds.  This won’t happen overnight but will increase Tidewaters’ profitability disproportionately in the interim.

The latter will bring a windfall of profits and cash.

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