Today's Buy Opportunity: Tidewater

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Exploration and production companies aren't the only way to invest in energy. For my "11 O'Clock Stock," I'm going to expand past our previous E&P picks into a new area. Service companies like Tidewater (NYSE: TDW  ) can be a great play on the sector offering excellent growth potential and a steady dividend.

Tidewater facts

Market Cap

$2.06 billion

Revenue (TTM)

$1.1 billion

Price-to-Tangible Book Ratio

1.0

EV/EBITDA

6.0

Cash/Debt

$122.9 million / $300 million

Source: Capital IQ, a division of Standard & Poor's.  TTM = trailing 12 months.

The company
Tidewater provides offshore vessels and marine support services to E&P companies in all phases of offshore field development. This includes towing services for offshore drilling units, construction and seismic support, and a variety of specialized services. Headquartered in New Orleans, the company actually had a vessel on site at the time of the Deepwater Horizon explosion, and its 13-member crew assisted in rescue efforts.

The oil spill in the Gulf has created a whole boatload of uncertainty as to where we go from here. With this in mind, I like Tidewater more for what it is not -- as in, it is not dependent on activity in the Gulf for revenues. In fact, over the past five years, almost 82% of revenues on average came from its international operations segment, which includes the Persian Gulf, Egypt, and Brazil. The recent slowdown in oil exploration has caused demand for Tidewater's services to slip. But like my golf game, oil is cyclical if nothing else, and as demand for oil comes back, companies are going to need Tidewater's services.

I also like Tidewater for what it is: a market leader. The company goes toe to toe in a highly competitive market with the likes of Seacor (NYSE: CKH  ) and Hornbeck (NYSE: HOS  ) and boasts the largest, most versatile fleet in its industry with more than 350 vessels. I like Tidewater's advantage here: When the tide turns, it will have the resources to meet the demand.

What could go wrong?
There are risks in any investment, and a global oil-related play can present its fair share of what-ifs. I am going to be keeping my eye on a few things:

  • Stack 'em: I will be keeping an eye on Tidewater's number of "stacked" vessels. When business is slow it withdraws unused vessels from service and docks them at port to cut back on operating costs. At the end of the June quarter, the company had 89 stacked vessels, up from 83 at the end of the March quarter. More stacked vessels mean less work and less revenue.
  • Global slowdown: Tidewater's exposure to the Gulf is limited. However, any potential legislation or movements contributing to a global slowdown in offshore exploration certainly could reduce the demand for the fleet support Tidewater provides.
  • A game of risk: While Tidewater's global footprint is a great advantage, it is also a risk in the geopolitical sense. An example here is the company's ongoing negotiations with Sonangol, the national oil company of Angola. Tidewater has a joint venture with Sonangol, but the national oil giant is pushing for more control over operations in the next agreement. Because of Tidewater's large presence in Angola, a falling-out could certainly affect the bottom line. While the company has expressed confidence that negotiations are going well, the risk cannot be ignored.

What's it worth?
Valuing Tidewater with a discounted cash flow model presents a wide array of possibilities. Depending on the price of oil, I get a range of anywhere from $40 to $65 fair value and even higher if oil goes through the roof again. So I find it helpful to look at multiples as well. Tidewater is currently trading at tangible book value and 6 times EV/EBITDA -- the low end of the spectrum for this company even at the bottom of the cycle. Looking back 12 years, Tidewater has traded at an average of almost 2 times tangible book value and 8.5 times EV/EBITDA. I expect these multiples (and Tidewater's share price) to improve as demand bounces back.

The Foolish bottom line
With Tidewater we are getting a two-fer: a company at the bottom of the cycle with additional pressure from the aftermath of the Gulf oil spill. While the spill has created a plethora of problems both known and not-yet-known, global demand for oil and safer conditions will help this tide rise again.

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Read/Post Comments (7) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2010, at 11:24 AM, TMFJMo wrote:

    Hey Fools,

    Hope Tidewater strikes everyone as an interesting pick. Let me know if you have any questions and I will do my Foolish best to answer them!

    Jason

  • Report this Comment On September 01, 2010, at 12:34 PM, TheDumbMoney wrote:

    I like Tidewater, have owned it, and have pitched it on this site. Keep in mind that the stock price has only gone up a bit over 200% in the last 30-some years. While I am never one to judge a company by its stock price, in this case TDWs stock price is indicative of the fact that it has been a very slow grower. It also rarely raises its dividend, for related reasons. With TDW back around $40 (up a bunch today though), I have considered getting back in, but given this history, I would certainly like to see more of an idea here of why TDWs growth trajectory is about to change. Obviously one can tell a nice global story about the growth of deepwater drilling, and the increasing need for support ships, but that industry has already shown some serious growth, and TDW does not seem to partaking in all of that growth, as of yet. I haven't looked closely at the company recently, but are you confident this secular trend is going to change a growth trajectory which, for thirty years, has remained relatively constantly low?

  • Report this Comment On September 01, 2010, at 12:35 PM, TheDumbMoney wrote:

    Or is this more of a 1-to-2-year, it's-depressed-right-now kind of pick for you?

  • Report this Comment On September 01, 2010, at 12:48 PM, TMFJMo wrote:

    I am OK with slow growth :)

    I would say it is a little bit of both in all honesty. I see this as a long-term holding with the opportunity to get in at the bottom of a cycle. That it is also feeling pressure from general sentiment towards oil due to the spill is an additional bonus. Their fleet gives the company a great competitive position and over the long-haul I expect oil to rise. Trading at their tangible book value I think is a great entry point as this is a company that continues to upgrade their fleet (I think their tangible book value as estimated is more reasonable). Plus I do like their global exposure as emerging economies contribute more toward global growth.

    Great points...thanks for posting!

    Jason

  • Report this Comment On September 01, 2010, at 4:56 PM, plange01 wrote:

    oil companys are cutting back and in many cases ceasing exploration under the assumption if they have not found the oil by now its not there to be found.in this scenario tidewater is toiletwater....

  • Report this Comment On September 02, 2010, at 8:19 PM, pinestholdings wrote:

    Plange01's insightful analysis of the end of the oil industry aside, I am a huge fan of Tidewater. You are slightly off on stacking though - stacking means that there is a more modern ship in the fleet that does the same job - when a ship is "stacked", it does not necessarily mean it is not booked (hence, "stacked"). Stacked is a queue to be sold. Rising stacked numbers is generally bad, but it is not nearly as simple as un-booked ships.

    Disclosure: Long TDW

    (TDW purchased at avg. of $39.78 is far and away my largest holding)

  • Report this Comment On September 07, 2010, at 9:10 PM, TMFJMo wrote:

    pine,

    Thanks for the comments. That was rather insightful of Plange, I agree.

    In regard to stacked vessels, yes I do agree that it is more than just "un-booked" ships, but stacked (as per the company's 10K) does not necessarily mean they will sell the ship. Depending on whether it is a "ready" stack or a "cold" stack will make a difference for sure, but they may or may not sell the ship either way. Regardless, as the company describes it for their particular situation, stacked essentially means that the economics aren't there for the ships at that time. As I am not in the oil industry, I cannot attest to what others do. But I thought that the most pertinent information regarding TDW would be what comes straight from their annual report. Other companies may use stacking for different reasons, I just don't know.

    Because it is one of a few identifyable risks though, there is limited space to write about it, and ultimately stacked vessels, as you mentioned, are typically not good.

    Thanks again!

    Best,

    Jason

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