Today we feature the American company Tidewater - a special case since it just emerged from a bankruptcy a year ago.
Tidewater has been reorganized and recapitalized and once it managed to get out of chapter 11 it was able to better absorb the still challenging market conditions in the industry the company is active in, known to be the most ungrateful of all: the hardly profitable business of providing vessels and marine services to the offshore petroleum industry.
After an almost complete freeze of offshore investments by the big players, by far the biggest order providers, it seems that the beginning of a recovery is looming, as the recent tremor among the order books of drilling companies shows.
For Tidewater, this tremor results in an increasing utilization rate of the fleet of 82% which is 7% more than during the last quarter. The daily rates are increasing too, with 10% compared to the previous quarter.
More generally speaking, specialists believe that the exhaustion of the conventional reserves - meaning except for the shale drill sites in North America - and the need for the big players to continue to exploit the perennial reserves in order to ensure their dividend payments - should in the more or less short term lead to a recovery of offshore investments.
Of course, these projections say more about those who make them than about what will actually happen…
Tidewater is still undervalued on its equity and this despite the fact that the risk of another bankruptcy has been put aside thanks to the optimal liquidity and the cash that entirely covers the long-term debt, which main expiry is in 2022. The company successfully tries - thanks to a strict cost control - to stay afloat while waiting for better days.
The operating cash flow for the first six months of 2018 reaches $10 million - minus the stock options - and easily covers the investment expenses of around $6 million. This positive balance is supported by an asset sale of $13 million.
Said asset sale allows the company to record an accounting gain of $3 million. Although it’s dangerous to extrapolate an isolated event, a priori this seems to indicate that the actual value of the float exceeds that of the amount on the balance sheet ($803 million).
The asset impairments have all been taken into account during the reorganization process. There are, therefore - a priori again, and with all the reservations that need to be taken into account - no more bad surprises.
Tidewater remains, however, depending on the market conditions in the hydrocarbon sector, and more specifically in the offshore drilling segment. For investors who are keen to expose themselves to this potential recovery context, Tidewater’s ordinary share offers in all likelihood a less risky alternative than the shares of its peers like Bourbon or Hornbeck Offshore, which are less diversified and above all less well capitalized.
For the past few months, the news has been dominated by the announced fusion between Tidewater and its historical competitor GulfMark which also just emerged from chapter 11. By joining their forces, the two heavyweights exceed all their peers in terms of scale and position themselves perfectly for a potential recovery.
At a current price of $28.60 per share and a market capitalization of $835 million - the dilutive effect of the warrants included - Tidewater trades at a discount of 15% on the value of its equity ($975 million at the time of its last earnings publication). The window of opportunity has thus narrowed since last year, without closing completely.
Of course, a discount that’s this small won’t satisfy some of the most careful investors who without a doubt want to maintain the high standards - but the situation deserves nevertheless to be followed closely.
If the price of the share returns to its post-bankruptcy levels from last year, it could offer both those who like short-term trades and investors who are more oriented towards the long-term an excellent opportunity.
(The author isn’t a shareholder).
Article published on 10/28/2018 | 09:34