December 23, 1996
Tidewater, Inc. (Nasdaq: TDW)
1440 Canal St.
New Orleans, LA 70112
Phone: 504-568-1010
Closing Price, December 20, 1996: $45 5/8
Trade: Buy 100 shares
Moving down the oil and gas industry food-chain, you've got the refiners and retailers, the transporters and pipeline companies, the drillers, and then the companies that service and supply the the rest of those folks. To use Peter Lynch's analogy, that last group of companies is like the ones that sold shovels and food to the miners during the California Gold Rush -- and ended up making more money than the miners did.
THE COMPANY
Tidewater, Inc. is a leader in the oilfield services group. The company's two principal divisions are Tidewater Marine and Tidewater Compression. Tidewater Marine provides support services to the international offshore petroleum industry. It accounts for approximately 87% of the company's operating revenues. The remaining 13% comes from Tidewater Compression, which provides natural gas and air compression equipment and services, primarily to the energy industry.
TIDEWATER MARINE. With a fleet of approximately 650 vessels, Tidewater Marine is the world's largest provider of offshore supply vessels and marine support services. The division operates, and has a leading market share, in most of the world's significant oil and gas exploration and production markets. Tidewater Marine provides services supporting all phases of offshore exploration, development, and production, including towing mobile drilling rigs and equipment, transporting supplies and personnel, workover and production activities, and supporting pipelaying and other offshore construction activities. The principal areas of the company's operations include the U.S. Gulf of Mexico, areas offshore Australia, Brazil, Egypt, India, Indonesia, Malaysia, Mexico, Trinidad, Venezuela, and West Africa, and in the North Sea and the Persian Gulf.
Quality Shipyards, Inc., a wholly-owned subsidiary, operates two shipyards in Houma, Louisiana, which build, repair, modify and drydock vessels. Approximately 62% of the shipyards' business for the fiscal year ended March 31, 1996 related to repairs, modifications and drydockings of Tidewater's vessels.
In March 1996 Tidewater acquired a fleet of 61 vessels owned and operated by Hornbeck Offshore Services Inc. as well as Hornbeck's 49.9% interest in 29 safety/standby vessels operating in the North Sea. During the fiscal first quarter ended June 30, 1996, Tidewater acquired the remaining 50.1% equity interest in 22 of the 29 safety/standby vessels. In fiscal 1996 Tidewater also acquired 28 used vessels, consisting of 8 towing-supply and supply vessels, 8 offshore tugs, 11 crewboats and 1 utility vessel.
TIDEWATER COMPRESSION. Tidewater Compression rents natural gas compressors to oil and gas producers and processors, primarily in the U.S., although the company has some operations in Argentina, Venezuela, and Canada. With a fleet of approximately 2,800 compressors, Tidewater Compression operates one of the largest rental fleets of gas compressors in the U.S. The compressors are used primarily to boost the pressure of natural gas from the wellhead into gas gathering systems, into nearby gas processing plants, or into high pressure pipelines. Gas compression equipment and services offered by the company also are used in enhanced recovery projects for increasing the amount of oil or condensate that can be recovered from a reservoir. Customers often rent compressors rather than purchase them because the required compressor horsepower and stage configuration can change several times in the lifetime of a project.
Tidewater Compression also sells air and natural gas compressor packages and other related equipment to domestic and international engineering contractors and oil and gas producers. The gas compression equipment is used to facilitate the production, transportation, and storage of natural gas as well as boosting fuel gas pressure for electrical power generation. The air compression equipment is used to operate machinery, for instrumentation, and in manufacturing processes.
COMPANY HISTORY
In 1954, retired Naval officer Alden Laborde and nine colleagues pitched in $10,000 each to form Tidewater Marine Service Corp. The company went public two years later, and Laborde's brother John was named president (and later, chairman and CEO). In 1961, Tidewater acquired Offshore Transportation Corp., inctreasing its fleet size to 56. The company acquired competitor Twenty Grand Marine Services in 1968, bringing its total to 358 vessels. It entered the compressor market that same year with the purchase of Sandair Corp. By 1994 Tidewater had mushroomed to 594 vessels, most of which were operating outside U.S. waters. Laborde retired as CEO in 1994 and was replaced by former Sonat Offshore Drilling chairman William O'Malley. O'Malley bulked up the company's compressor fleet by acquiring Halliburton Compression Service and Brazos Gas Compressing.
COMPANY PERFORMANCE
Fiscal 1996 operating performance was significantly better than in prior years due to more favorable market conditions for offshore marine services and a full years' impact of an expanded natural gas compressor rental fleet. Net earnings grew 49% above the prior year, after allowing for non-recurring items in both FY96 and FY95. Demand for services provided by the company's marine division remains strong, and recent improvements in the pricing of natural gas should have a positive impact on the company's natural gas compression operations.
Through the first two quarters of FY97, operating margins, overall utilization, and average day rates have increased for the Marine Division:
Six months ending Sept 30
1996 1995
Oper. margin 41.7% 38.8%
Utiliz. rate 83.6% 77.8%
Aver. day rate $3471 $3071
For the same periods, operating margins for the Compression Division have contracted slightly, to 56.5% from 58.3%, but overall utilization has increased, to 75.8% from 72.1%.
At the end of the September 1996 quarter, Tidewater had $28.1 million in cash, total current assets of $242 million, and total assets of $1.04 billion. Current liabilities were $96.1 million, yielding a current ratio of 2.52:1. Unlike virtually all other companies in its industry group, Tidewater has zero long-term debt. Total stockholder equity is $781.6 million.
Net profit margins have been rising steadily since the early 1990s -- from 5.8% in 1991 and 1992 up to around 16.0% currently, according to Value Line. Value Line projects net margin in 1997 to be 17.0% and sees additional margin growth potential from there.
Net cash flow has been essentially neutral through two quarters of FY97 as cash inflows have been offset by investments to enhance Tidewater's effective capacity. These investments make good sense, as off-shore exploration and drilling activity has increased substantially due to increasing global energy demands while the total available fleet to service this activity has not grown.
THE STOCK
Tidewater shares hit a high of $50 in mid-July but then plummeted to the low $30s when the sector slumped briefly and the company failed to meet analysts' expectations for its first fiscal quarter of 1997. Since then, the stock has recovered and is testing its old high.
At its current stock price in the mid-$40s, Tidewater's market capitalization is approximately $2.8 billion -- or around 3 times projected sales for the fiscal year beginning in March 1997.
According to First Call, the consensus of 13 analysts is that Tidewater will earn $0.62 per share for the December 1996 quarter, which would constitute a 55% gain over last year. The earnings report is expected in late January. For the FY ending March 1997, analysts are looking for $2.15, versus $1.35 in FY96 (net of a non-recurring charge of approximately $0.12 associated with the Hornbeck merger).
Estimated long-term compound annual EPS growth rate is approximately 20%. For FY98, current thinking is that Tidewater could make $3.00. That would justify a target price of $60 by mid-1997 for TDW -- or approximately a 30% gain from present levels.
In addition, TDW pays a small dividend, which was increased in July from $0.125 per share to $0.15 quarterly. That currently works out to an annual rate of approximately 1.3%. On December 5, 1996, the company announced a plan to use up to $200 million to repurchase shares.
Insiders control approximately 4.7% of Tidewater shares (source: 1996 Proxy statement). According to the Wall Street Journal, 304 institutions collectively hold 83% of the 62 million outstanding shares.
IBD rates TDW 90 on EPS growth, 80 on Relative Strength, and B on accumulation/distribution.
CONCLUSION
The oil patch is a volatile place. Stocks can rise or fall rapidly, depending upon global oil and gas prices, the weather, international conflicts -- lots of things. TDW is a relatively volatile stock (Beta = 1.24). If such excitement doesn't fit with your tastes, this stock may not be for you. On the other hand, TDW is one of the comparatively less risky stocks in its group, its valuation has not gushered as many others have, and its financial underpinnings are better than its peers. As best as anyone can forecast such things, share price appreciation prospects look very good.
