Tidewater Inc.: Setting Itself Up For The Future

When I think of a shipping company involved in the oil business, I think of large tankers full of oil, moving it between the producers and the consumers. Until I conducted further research, I assumed Tidewater (TDW), listed in the shipping industry, was an oil tanker company. I was quite wrong.

TDW is focused on using its fleet of 463 vessels to service the oil field industry. For all the Exploration and Production work being done in the world’s waters, there is a good chance that TDW has a hand in it somewhere. TDW’s fleet is used to support everything from supply and personnel transport, to anchor handling, to towing, to construction and maintenance, to pipe and cable laying, to diving, to cargo hauling, and even 3-D seismic exploration work. Here are some pictures from their website:

Anchor Handling Vessels:

Platform Supply Vessels:

Offshore Tugs:

Fast Crew Supply Vessels (Cool!):

Utility Vessels:

Specialty Vessels:

TDW’s top priority going forward is fleet renewal. Why? Well necessity may be the obvious answer, but the motive is really for profit. In Fiscal 07, the 25% of their fleet built or acquired since 2000 accounted for nearly 48% of the profit. Dayrates on the new vessels command twice the price as the older vessels. What’s more impressive is that they are accomplishing this priority by using current cash flow, and not acquiring new debt. TDW has realized what a lot of other energy companies have realized…that expanding itself globally is the quickest way to spruce up profits. Exploration and Production operations are expanding faster internationally than they are in the US. TDW now achieves 85% of revenue from international operations, versus 49% ten years ago. Let's dive into TDW's fundamentals:

1) PEG Ratio. To me, no other number can tell you something about the stock's value potential, and growth potential than the PEG ratio. Usually, anything under 1.0 is considered a buy. I look for much better than that, typically less than 0.5. TDW’s PEG ratio is at a bargain basement value of 0.17.

2) Price Momentum. Achieving a low PEG ratio is great, but not by sacrificing stock price to get there. I’m not real enthused with TDW’s recent price action. The energy sell-off in July and August affected TDW’s price more than the average energy stock. I like to see the price above the 50 Day Moving Average. Although TDW approached that last week, it has retreated a bit over the last few days. As an alternate screen to the 50 DMA test, I’ll accept a stock that is within 15% of its’ 52-week high. TDW is within 19%.

3) Market Cap. TDW’s market cap stands at $3.6 Billion. I generally focus on stocks with market caps of under $3 Billion, but will go above that in the case of a stock I believe in.

4) Profitability. I want it, and TDW’s got it. TDW sports a 10% ROA and a 21% ROE. These numbers impress me when you consider the fact that TDW is aggressively upgrading its fleet with the cash it has on hand. Most companies would accept a temporary negative ROA/ROE, but TDW is smartly lowering the average age of its ships, while still turning a profit.

5) Total Debt to Equity. I look for a total debt to equity ratio of less than 0.25. TDW comes in at 0.18. Again, an impressive number considering the amount of money required to upgrade its fleet.

6) Estimated Sales Growth. I look for positive sales growth before buying a company. Analysts estimate TDW will grow its next quarter sales by 15%.

7) Insider Transactions/Ownership. There have been no insider purchases at TDW for over a year. Barring any recent transactions, as long as the company has some positive level of ownership in their company, I'm happy. TDW insiders own just under 6% of the company. The only positive slant I can put on this is that there are very few shares for insiders to sell, but a lot of room for insiders to load up. It should be noted however, that the company recently (June 07) completed a $2.56M share buy back program, and has the authority to repurchase $200 million more. Since they bought their last shares at around $60, I would not be surprised to see them buy more if the price goes down any more. This chart represents insider purchases over the last five years:

8) Common Sense Test. If you’ve read any of my other posts, you know I’m bullish on oil prices long term. I see no end to the increasing demand and diminishing supply. I see interest rates as well as the dollar continuing to fall for at least 12-18 months. I see Mideast tensions continuing to escalate. Oil may seem expensive, and overextended now, but on an inflation adjusted basis, it's not. I would even argue that the pullback to the $78-79 range makes it “cheap” when compared to the falling dollar. Another item I’m excited about is that domestic vessel dayrates have soared 125% over the last 3 years. TDW is definitely in the right business.

Bottom Line

TDW is setting itself up for the future. By raising cash, and renewing its fleet, it is in a perfect position to make a new acquisition. This is pure speculation on my part, but I see TDW setting up for such an acquisition. TDW is the leader in what they do, but competition is abundant in this field. TDW is renewing their fleet, but expansion has always been on their long term goal sheet. I would not be surprised to see TDW make a move with the current low debt, high cash position. As I mentioned in my post about Hercules Offshore (HERO), they acquired several towing/tugging vessels when they acquired TODCO. This portion of their business is outside their normal focus and only accounts for 6% of their overall revenue. I would not be surprised to see HERO sell off their Delta Towing fleet to a company like TDW, whose bread and butter is in this area. Again, that’s pure speculation. Tidewater has many positives, but two things make me pause, the recent price action and the lack of insider purchases. Once the future becomes a little more clear, maybe after an acquisition, I think company insiders may start picking up shares again. In my opinion, this stock may trade flat for several months as the fleet upgrade continues. But I believe 12-18 months from now, if you are long on this stock, you will be pleasantly surprised. I honestly feel that I am a little bit “early” on this call, but isn’t that the way good value investing is supposed to be? It’s hard to ignore a stock with nearly all the fundamentals in place sporting a PEG of 0.17. With only slight reservations for being a little early in this call, TDW is being added to The Monthly Stock Portfolio.

Disclosure: Although profiled today, in accordance with my buying criteria, I will not be adding this to the portfolio until 1 October’s opening price.

Comments

[primorec]

ad PEG.) Based on what you get PEG 0.17. FY 09 EPS +5% according to estimates. That give you another number.
ad Insiders) There were 13 mio+ $ sales in May by Taylor Dean E and no insider buy. Nothing positive here.

Regarding other ratios, not so special, not so cheap. I am not following it, so from its business perspective I am not sure.
Just few observations......good luck

[MarkGillCPA]

Matt,
Good article. However, when I see an unusually low PEG ratio, I suspect something is wrong. In this case, the forward PE of 9.5 looks good, but the 5 year growth rate of 56% per year for the next 5 years is not realistic. That would imply EPS of $62 per share 5 years out! If EPS are growing 5-10% this year, how are they suddenly going to grow +60% in the 4 years after that?