Case Study Of Tidewater And The Capital Cycle

Below is a case study of the capital cycle using Tidewater an offshore oil and gas playas an example. This page will be updated over time. This is not an investment recommendation but an ongoing case study. by John Chew, CSInvesting.

Tidewater: offshore oil and gas

Tidewater (TDW) - $6 on March 17, 2020, $315 million Enterprise Value, EBITDA of $15.3 million) offers an asymmetric risk reward opportunity for investors who can understand:

  • this deeply cyclical industry. An investor must relate Tidewater to its environment.
  • what Tidewater’s clean balance sheet of only $61 million of net debt (debt of $279 – 218 million of cash or 24% net debt to market capital using a $6 price per share as of March 17, 2019 and 42.4 million fully diluted shares) allows management to further consolidate a depressed industry at its trough while almost all its public competitors are distressed with zero equity values. Those circumstances offer Tidewater’s management a strong strategic but temporary advantage.
  • that Tidewater’s assets are trading perhaps at 1/8 to 1/10th of their replacement value, and--while the market may further deepen the discount between the market price and replacement value during the current market dislocation—it shows the potential opportunity. Replacement values will be relevant when and if the industry can return to its normal economic returns of 45% to 50% vessel operating profits. Currently, replacement values have no bearing on market prices because the entire industry is distressed. Replacement values indicate the price of new supply.
  • management has had successful experience consolidating the industry during the industry’s last major trough of 1982 to 1990. Some industry participants (The Cajun Mariner) consider this the worst downturn in the 65-year history of the OSV industry. “Too many ships, too much debt, and too many managers.”
  • the current perceived oversupply of 1,200 boats may be overestimated by the market because of the deteriorating economics of returning vessels to service and the length of layups. Vessels are rusting in place.
  • institutional shareholders such as Robotti & Co., Third Avenue Value, Moerus, and Raging Capital are all experienced small cap investors who can protect the interests of long-term shareholders.
  • the necessity to be a long-term (three-to-five year) shareholder who is not adversely affected by price volatility and who will sell when capital becomes available for building new vessels. When capital returns aggressively to this cyclical industry, will be the sign to exit.
  • that the offshore oil and gas industry must resume projects to replenish dwindling reserves while onshore tight oil and gas (fracking) declines rapidly in supply due to capital constraints and less Tier 1 acreage.
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