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WIKI ANALYSIS
Tidewater (NYSE:TDW) owns and operates the world’s largest fleet of supply vessels for the offshore oil industry. Its fleet of nearly 450 platform service vessels are used to transport people and supplies to offshore installations around the world.[1] Besides supply, its work includes towing and positioning mobile drilling rigs, and assisting offshore construction projects. Tidewater's primary competitors are Hornbeck Offshore Services (HOS), SEACOR SMIT (CKH), Hercules Offshore (HERO) and GulfMark Offshore (GMRK).
From 2003 to 2007 TDW’s total revenue increased by 77% and its operating income by 230%.[2] The company’s rapid increase in revenue is a consequence of rising oil prices. Higher oil prices have led oil companies to spend more on offshore drilling, as many of these installations are only profitable when prices are high. With more offshore drilling comes a greater need to service and supply these offshore installations, which often require specialized ships to transport specialized cargo. As a result of this demand, TDW's average day rates have gone up from $5726 in the first quarter of 2005 to $9039 in the fourth quarter of 2007.[3]
The largest offshore drilling investments have been in deepwater drilling, where oil fields are as yet untapped to to costs that were previously prohibitive. These additional installations not only increase demand for the supply vessel industry, but also warrant higher day rates due to the costly nature of working at a greater depth and distance from shore. Tidewater added 2 deepwater towing supply vessels to its fleet in 2005, and another 3 in 2006.[4] Service providers in the offshore oilfield services industry are often impacted by strong regional weather patterns, like hurricane season in the Gulf of Mexico and winter storms in the North Sea. Tidewater’s international presence and limited reliance on individual regions helps to decrease the operating risk posed by these natural disasters.
Business Financials
Tidewater Inc. gets a majority of its revenue from international service, with international revenue accounting for 80%, 77% and 78% of total revenue during fiscal years 2005, 2006 and 2007, respectively. The offshore drilling industry served by Tidewater, operates in a boom and bust cycle. A majority of Tidewater’s national revenue is from the domestic natural gas production industry, which has slowed in the past few years, while the growing international sector is based on supplying offshore oil drilling platforms. At the end of 2007 Tidewater was operating at a 45% operating margin and a 30% net profit, thanks to high oil prices raising demand for oilfield services and, subsequently, industry dayrates.[5]
The values are from the company's annual reports that cover through March 31 of the years listed.[6]
The five largest customers accounted for 43% of TDW’s revenue in 2007, the largest being ChevronTexaco (CVX) at 15% and Brazilian Petroleum Corporation (PBR) accounting for 10%.[7]
Key Trends and Forces
Rising Oil Prices Increase TDW’s Total Revenue
Tidewater’s revenue increases with the continued growth of the oil industry. The major service provided by the company is transportation and the cost of fuel is a significant portion of their spending. Although an increase in the cost of fuel raises Tidewater's operating cost in the short term; the increased spending is offet in the long run by increased demand for its service. The company’s largest customers, oil companies, increase capital investment for exploration and offshore drilling when crude oil prices are high.[8] During times of expansion in the offshore industry, additional demand and limited availability of drilling vessels creates a bottleneck that forces day rates higher and increases the revenue of company's in the oilfield services industry. During times of heightened spending from the oil industry, nearly all rigs are utilized and few are retired, due to the extensive cost and construction time of new rigs. These times of increased activity and the need to update older rigs increases the industry's demand for offshore service providers like TDW.
Growth in Deepwater and Ultra-Deepwater drilling has Increased Revenue
With the increased cost of oil and the availability of new technologies, deepwater drilling has become more profitable. Deepwater supply vessels require a greater investment in capital, which limits the ability of smaller oilfield services companies to enter the deepwater and ultra-deepwater sectors of the industry. Tidewater’s size gives them an advantage in that they can develop a competitive deepwater segment. They have the capital to invest in the more expensive deepwater supply vessels, and are in a position to build these themselves, through their subsidiary, Quality Shipyards.[9]
Weather’s Impact on Revenue
Operating in deep water with offshore rigs puts the company at risk for maritime disasters, inclement weather, and property loss. The company is subject to normal and extreme seasonal weather patterns that can damage their fleet, such as tropical storms and hurricanes. Extreme weather can also serve to increase demand in the affected area, as was the case with hurricanes Katrina and Rita. TDW’s fleet was not significantly damaged by Hurricane Katrina or Rita, and the company’s revenue ended up increasing as a result of the storm. The additional work to rebuild the offshore drilling network after the hurricanes increased company revenue from for the second half of 2006. The average day rate for the vessels went from $6730 for the first quarter and $7191 for the second, and increased to $7655 and $8078 for the average day rates in the third and fourth quarters.[10]
An Increase in the Size of the World Fleet Results in Lower Day Rates
The vessels within the offshore supply industry are specialized for specific purposes, such as towing, drilling or transport. There is little to distinguish the same types of vessels operating under different firms, and so the day rates for each type are determined primarily by a vessels immediate availability and the demand for that type of vessel. Based on current orders, it is estimated that 548 new offshore service vessels will be built in the next five years, not including those built for TDW.[11] Service providers retire older vessels when demand decreases and operating profit drops. The process of retiring vessels when day rates drop helps to stabilize prices, but an increase in the size of the world fleet will result in lower day rates if it is not matched by an increased demand from the offshore drilling industry.
Competition
- Hornbeck Offshore Services (HOS)
- SEACOR SMIT (CKH)
- GulfMark Offshore (GMRK)
- Hercules Offshore (HERO)
- Superior Energy Services (SPN)
- Helix Energy Solutions Group (HLX)
Hornbeck, Gulfmark, Seacor, and Hercules are the primary competitors of TDW in the vessel supply industry. The other competitors, HLX, and SPN, although larger, obtain only a minority of their revenue from their supply vessel services.
- Both SPN and HLX have significant earnings outside of the supply vessel industry. Data is for 2007.
- Data is for 2007
Notes
References
- ↑ TDW Company Profile April 18,2007
- ↑ TDW 10-K for year ending March 31 2007 pg 11
- ↑ TDW 10-K for year ending March 31 2007 pg 31
- ↑ TDW 10-K for year ending March 31 2007 pg 20
- ↑ The Long Case for Tidewater Inc December 5 2007
- ↑ Google Finance: TDW
- ↑ TDW 10-K for year ending March 31 2007 pg 9
- ↑ Energy and Capital “Offshore Drilling Boom”
- ↑ TDW Website April 18, 2007
- ↑ TDW 10-K for year ending March 31 2007 pg 9
- ↑ TDW 10-K for year ending March 31 2007 pg 12
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