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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





$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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Fool analyst Jason Moser owns no companies listed above. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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