Tidewater Is Moving In The Right Direction

About: Tidewater Inc. (TDW)
by: Vladimir Zernov

Tidewater reports Q1 results.

The company reactivates capable vessels and scraps old ones.

2019 is set to be a better year than 2018 for Tidewater.

Back in March, I wrote that Tidewater (TDW) was an interesting speculative be on offshore support vessel rebound. Since that time, the stock traded in a choppy fashion, but fared much better than most offshore drilling shares:

The company has recently reported its Q1 2019 earnings results, and it's high time to look at Tidewater's results.

Tidewater reported revenues of $122 million and a loss of $21 million. The company lost $3 million in operating cash flow, but got some money from asset sales and ended with roughly the same cash position as at the beginning of this year. It's important to note that the first quarter is seasonally weak, so Tidewater is clearly on the way to positive operating cash flow - a major development for the company in an industry that was hurt the most following the oil price slump and slow recovery in offshore drilling. Technically, the positive operating cash flow was reached in 2018 when the company had $4 million of positive operating cash flow, but, of course, a more significant cash flow number is required to provide material upside for the stock.

As the market is slowly turning to the upside, Tidewater has reactivated five vessels. As per the earnings call, Tidewater is planning to complete the reactivation work on five more vessels in the next few months. At the same time, the company sold 16 vessels in the first quarter and an additional 12 vessels in the second quarter.

Source: Tidewater 10-Q report

Generally, the management sounded positive during the earnings call - a view shared by many teams in the offshore drilling/offshore support vessel space this earnings season. I share this view, although I believe that recovery will be gradual. I believe that we'll see more contract awards in the second half of the year as oil companies will be finalizing their plans for 2020 and beyond, leading to higher utilization in offshore drilling and, therefore, in the offshore support vessel space.

Currently, Tidewater is priced very conservatively. The company has zero net debt, if we assume that Tidewater will continue getting back money stuck in Angola - this has been happening lately. It trades at a discount to book, which is important in this case as both Tidewater and Gulfmark (which form the current Tidewater) went through restructurings and had to reemerge with fresh start accounting and corresponding impairments.

While its valuation looks attractive on the fundamental front, there are a few practical problems. First, offshore drilling stocks recently suffered a material sell-off as the market was disappointed with first-quarter results (despite the fact that they contained no major surprises). Such a selling wave puts pressure on the offshore support vessel stocks which are part of the same service chain. Second, a clear internal catalyst in the near term looks unlikely. I believe that we'll see better results in the second-quarter report, but the real change should start happening closer to the end of this year. Therefore, anyone willing to bet on Tidewater for fundamental reasons should consider an appropriately long time frame.

To sum up, I believe that the longer-term trend of Tidewater is to the upside, while short-term trading might be choppy and will depend heavily on oil price movements and flow/outflow of money into everything offshore-drilling related.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.