Boring Portfolio

Boring Portfolio Report
Wednesday, June 11, 1997
by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (June 11, 1997) -- The Boring Portfolio rose more than 1% Wednesday to move above the $64,000 mark in net asset value. Seven of nine holdings rose on the session.

The only stock that hasn't participated in the Borefolio's spring surge is TIDEWATER (NYSE: TDW). That leading international offshore energy services company is the focus of tonight's recap.

When I added New Orleans-based Tidewater to the Boring Portfolio late last December, crude oil prices were approaching $28 a barrel -- approximately 50% higher than they were at the beginning of 1996. Industry analysts were hardly expecting a repeat performance in 1997, but the prevailing expectation was that prices would nevertheless average out well above $20 for the year.

Whether that forecast will pan out ultimately is anyone's guess. At the moment, however, the trend is definitely not the friend of oilpatch stocks. As reported in the Wall Street Journal today, crude-oil futures prices have fallen 27% since the beginning of the year. Yesterday, July West Texas crude finished at $18.67 a barrel, a 12-month low.

Oil (and natural gas) pricing affects Tidewater directly, because energy exploration and new drilling slackens when prices drop below a level that makes such activity economic.

Are we there yet? The answer to that one is relatively uncontroversial, and it is: "Nope."

Are we likely to get there soon? That's the right question to ask, and answers are all over the map -- literally. Here in the U.S., gasoline demand is down, yet refiners are operating at 100% of capacity, replenishing reserves. The situation gets further complicated by geopolitical considerations. Does a possibly kinder, gentler Iran presage increased oil flows from that nation? And what is the news of the day from Iraq? And OPEC -- how much discipline will that cartel be able to impose on its members?

As the share prices of Tidewater and other oil services outfits indicates, there's no shortage of bears. They are of the view that current record-high dayrates for drilling rigs and marine services must come down, and soon.

As one manager of an offshore exploration business in the Gulf of Mexico put it to me yesterday, "Boat rates and rig rates have sailed out of sight. We pay more per day for a workboat now then we use to pay for a 250' jackup only a few short years ago. I think without substantial long term product price improvements very soon, companies like mine will make the decision to quit drilling rather than pay these rates and take a future write-down."

Other opinions are more favorable to the fortunes of Tidewater and companies like it over at least the next year or two.

The bulls point out that, first of all, it is not strictly the prices of oil and gas that matter, but rather the difference between those prices and the costs of production. With high-tech exploration devices and sophisticated drilling methods, producers are able to extract energy at comparatively lower costs than they could even a few years ago. Unless the price per barrel drops substantially lower -- under $18 a barrel at a minimum -- the drillers and rig servicers will enjoy all the business they can handle.

Second, in some ways the moderating price of oil may actually work to the benefit of oil services outfits: prices are high enough to generate good profits, but not so high as to justify any significant amount of new construction of drilling rigs or servicing vessels. Certainly this has been Tidewater's position.

Moving beyond industry-wide considerations and focusing more specifically on Tidewater, the company recently completed an acquisition of O.I.L Ltd. and its 100 vessels, bringing Tidewater's total navy to approximately 750 boats and thereby further enhancing the company's voice in determining the course of dayrates. Tidewater took on approximately $300 million in debt to finance the acquisition, but the company intends to pay that down in less than three years from its strong cash flow.

According to the latest estimates available from First Call, analysts project that Tidewater will earn $3.33 per share for its fiscal year ending March 1998. At today's closing price of $41 1/8 (up $1/8), TDW is trading at 12.3 times those forward earnings. That's well below the 41% EPS growth the company is expected to enjoy this year. It is also shy of the 14 to 20 percent annual EPS growth that analysts project for Tidewater over the next five years or so -- to the extent that such things are forecastable. Tidewater's dividend, which currently works out to around 1.5%, should also get factored in.

So is there risk in holding Tidewater? No doubt. But are the prospects for an above-average total return in tact? Yes, I think so -- particularly in view of the stock's recent decline.

So Tidewater stays in the Borefolio -- at least until new evidence appears that suggests we should revisit the decision.

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Stock  Change    Bid
ATLS  +1 1/8   35.38
BGP   +  7/8   24.75
CSL   +  7/8   34.25
CSCO  -1 1/4   63.69
GNT   -  3/8   35.25
ORCL  +1 1/16  48.63
OXHP  +  1/16  72.00
PMSI  +  1/8   11.63
TDW   +  1/8   41.13
                   Day   Month    Year  History
        BORING   +1.05%   5.04%  11.39%  28.18%
        S&P:     +0.50%   2.51%  17.39%  39.89%
        NASDAQ:  +0.44%   0.54%   9.05%  35.25%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     24.75   119.88%
   3/5/97  150 Atlas Air     23.06     35.38    53.42%
  5/24/96  100 Oxford Hea    48.02     72.00    49.92%
  8/13/96  200 Carlisle C    26.32     34.25    30.10%
  6/26/96  100 Cisco Syst    53.90     63.69    18.16%
   2/2/96  200 Green Tree    30.39     35.25    16.00%
   3/8/96  400 Prime Medi    10.07     11.63    15.46%
 11/21/96  100 Oracle Cor    48.65     48.63    -0.05%
 12/23/96  100 Tidewater     46.52     41.13   -11.61%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49   9900.00  $5397.51
  5/24/96  100 Oxford Hea  4802.49   7200.00  $2397.51
   3/5/97  150 Atlas Air   3458.74   5306.25  $1847.51
  8/13/96  200 Carlisle C  5264.99   6850.00  $1585.01
  6/26/96  100 Cisco Syst  5389.99   6368.75   $978.76
   2/2/96  200 Green Tree  6077.49   7050.00   $972.51
   3/8/96  400 Prime Medi  4027.49   4650.00   $622.51
 11/21/96  100 Oracle Cor  4864.99   4862.50    -$2.49
 12/23/96  100 Tidewater   4652.49   4112.50  -$539.99

                             CASH   $7788.54
                            TOTAL  $64088.54