Q3 Report Disappointment
Last month, leading offshore support services provider Tidewater Inc. or “Tidewater” reported mixed third-quarter results, with little top-line performance more than offset by earnings per share that were well below consensus estimates for a second quarter in one line.
However, the loss appears to have been largely a function of analysts not properly adjusting their models for the last $580 million. APPROPRIATION of 37 platform supply vessels from competitor Solstad Offshore (OTCPK: SLOFF) and the resulting material increase in depreciation.
From an adjusted EBITDA perspective, things were looking much better as the reported number of $117.2 million was slightly below expectations due to the longer-than-expected duration of repairs, as described from management to conference call.
Additionally, average daily rate and vessel operating margin (gross margin) reached new multi-year highs:
Third quarter earnings well exceeded our expectations as a continued push in day rates globally increased consolidated day rates by approximately $1,800 per day sequentially, representing the largest sequential improvement in day rates since the beginning of recovery.
The pace of the daily rate expansion was largely a combination of older contracts moving to current market day rates and a significant jump in the daily rates of short-term contracts; futures rose to $28,609 sequentially, an improvement of about $5,100 a day compared to the same measure in the previous quarter.
Momentum in day rates has been driven by a global supply shortage of large and small offshore vessels and, in fact, our medium and small PSV classes showed the most relative improvement in contract day rates with high term during the third quarter.
However, the fixes discussed above resulted in missing the company’s margin target for the quarter:
Gross margin increased 1%, excluding one-time charges of $4 million related to the integration of Solstad. We were trying to grow 5 percentage points, but the extra time for repairs reduced revenue and increased costs. 2% of excess downtime this quarter cost us $6 million in revenue and $6 million in costs, which would be another 3 percentage points of gross margin.
It is not unusual for vessels to experience higher downtime as newly reactivated vessels return to high intensity of service after a period of low to medium intensity, but our recent experience has been higher than we expected. .
The company will miss its full-year gross profit target
For the fourth quarter, the company forecast revenue of $309 million and gross margin of 47%. While that would be in line with previously issued full-year top-line guidance of just over $1 billion, gross profit would miss management’s $500 million target by roughly 10%.
During the conference call’s question-and-answer sessions, management pointed to expectations for another quarter of higher downtime and associated higher repair costs as the reason for the lower margin guidance.
Improvement of the material foreseen for the next year
Looking to 2024, Tidewater expects revenues of $1.40 billion to $1.45 billion and gross margins of 52%.
Based on my assumptions, full-year adjusted EBITDA will increase to approximately $650 million, up from approximately $370 million estimated this year. Please note that a significant part of the increase will be contributed by the vessels purchased from Solstad Offshore at the beginning of the third quarter.
But given the recent lull in contracting activity for deepwater rigs and a resulting increase in projected idle time for a significant number of riggers next year, management’s outlook could turn aggressive again.
Valuation and price target
However, with the medium-term outlook for the offshore drilling industry still promising and more and more low-margin legacy contracts moving to prevailing market rates, I would expect further improvements in utilization and margin over time , resulting in adjusted EBITDA growth in 2025 of approximately $750 million.
Assigning an adjusted EV/EBITDA multiple of 6x would give a $77.50 price target for the stock, thus providing more than 30% upside from current levels:
That said, with most offshore drillers and smaller competitor SEACOR Marine Holdings (SMHI) offering significantly higher upside, I wouldn’t aggressively pursue Tidewater stock at this point.
In fact, with oil prices under pressure and a somewhat disappointing near-term outlook for most deepwater drillers, I’d advise against overweighting offshore energy utility stocks right now.
On the other hand, investors looking for exposure to the industry can consider scaling up in select stocks with Seadrill (SDRL), at least in my opinion, currently The offer of best risk/reward scenario.
Main risk factor – Oil price correlation
Please note that offshore energy utility stocks remain highly correlated to oil prices, so any sustained downward movement in the commodity will almost certainly result in industry stocks taking a hit, as evidenced by many return experienced in recent weeks.
For the second straight time, Tidewater’s quarterly earnings per share missed consensus estimates by a wide margin, largely due to analysts’ models not yet reflecting materially higher amortization expense related to its recent $580 million acquisition of 37 platform support vessels from competitor Solstad Offshore.
Additionally, the company’s financial performance was impacted by a combination of unplanned vessel outages and resulting high repair costs, which are expected to continue for the remainder of the year.
Consequently, Tidewater now expects full-year gross profit to be 10% below previously stated expectations.
For 2024, the company expects revenue and gross profit to increase materially. Based on the numbers provided by management, I would expect adjusted EBITDA to grow 75% to approximately $650 million.
However, with most offshore drillers and smaller competitor SEACOR Marine Holdings currently offering higher upside and considering the less-than-stellar investor sentiment, I wouldn’t aggressively pursue Tidewater’s stock at this point.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. stock exchange. Please be aware of the risks associated with these stocks.