Tidewater Maintains Weak OSV Outlook, but Positioned for Opportunities

Offshore supply vessel (OSV) firm Tidewater Inc. expects the global OSV market to remain weak until at least the second half of 2016 as customers delay or defer offshore drilling work due to the weak oil commodity market and oversupply in the global OSV market.

Tidewater’s revenues declined by 16 percent from its December quarter to March quarter due to lower utilization rates and reduced average day rates as a number of its customers terminated offshore drilling rig contracts early and are deferring other offshore work.

“While lower exploration and development activity has most directly impacted overall demand for offshore support vessels, continued growth in the offshore vessel fleet also has suppressed vessel day rates and utilization,” said President and CEO Jeff Platt said in a May 27 conference call.

Platt reiterated the company’s outlook that a “meaningful” industry recovery may not occur until the later part of 2016 or even into 2017. The near 25 percent rise in oil prices that has been seen with the ending of Tidewater’s March quarter has caused speculation that the oil and gas industry has seen the bottom in oil prices for this cycle.

“We certainly hope this is the case, but in our view, it is premature to believe that we have experienced the worst of the cycle’s downturn in terms of commodity pricing,” Platt commented.

Tidewater’s read of market trends and its clients contracting strategies suggest that the industry should be prepared for an extended downturn, Platt said.

“If oil prices continue to recover, then we could look for a better 2016, but the reality is that 2015 will be a very difficult year for oil and gas operators and their equipment and service providers.”

However, Platt said the company’s global operating footprint and experienced management team should provide Tidewater with visibility on acquisition or investment opportunities and provide the company with scope for cost synergies in the context of possible industry consolidation.

“I would say that you would have to look from the characteristics that if there are to be consolidators, I think Tidewater has the right attributes for it,” said Platt, adding that he doesn’t hope for an extended downturn, but a little bit of consolidation wouldn’t hurt the supply vessel industry. But given how fragmented the industry is, consolidation is not going to be a major answer to turn it around.

Platt said that investment opportunities may also exist for remotely operated vehicles for subsea and construction work, which is a growing portion of Tidewater’s business. Platt said Tidewater doesn’t necessarily see a big pullback in these areas. With 60 percent of its activity driven by rigs, Tidewater thinks that exposure to the ROV segments and vessels associated with inspection, maintenance and repair work would be helpful in balancing its business, Tidewater Chief Financial Officer and Executive Vice President Quinn P. Fanning said during the conference call.

“I think it’s fair to say that if we have an excess supply issue on the OSV side of the business, that excess supply is probably also real on the subsea vessel side of things,” Fanning said.

Tidewater reported May 27 a fully diluted loss for the fourth quarter of its 2015 fiscal year of $.19, which includes a $4.1 million restructuring charge, $6.4 million of asset impairment charges and a $23.8 million non-cash adjustment to deferred tax assets. These charges collectively impacted Tidewater’s earnings per share by about $.69.

Tidewater expected declines in revenues, vessel utilization and average day rates from its December quarter to its March quarter as it customers reduce their 2015 capital spending plans and delay and defer offshore projects, said Platt. However, the pace and magnitude of the decline is nearly unprecedented, “reflecting the aggressive cost reduction initiatives that many of our customers implemented in response to lower commodity prices,” Platt noted.

Given that it may take time for acquisition opportunities to emerge, the company in the March quarter initiated global cost-cutting initiatives that reduced vessel operating and general and administrative costs for the quarter to less than previous estimates. Tidewater other belt-tightening activities include cancelling in April three vessel construction contracts due to poor shipyard performance. This month, Tidewater also reached an agreement to have the option to take delivery anytime before June 30, 2016 of two deepwater platform supply vessels under construction with another shipyard. If the company doesn’t take delivery, it will be entitled to receive a return of milestone payments made to-date totaling $5.4 million per vessel plus interest. The company also will not have pay the shipyard the $21.7 million in remaining payments per vessel.

Tidewater is seeking to reduce costs through a combination of staff and wage reductions, selective deferral of drydockings and major repairs, and stacking of underutilized vessels, Fanning said. Platt couldn’t quantify how many vessels Tidewater and its competitors might stack. While the scrapping of older vessels has been an ongoing issue, some companies have reported stacking new and newer equipment in the United States.

Despite weaker financial results than seen in previous quarters, Platt said that Tidewater officials are comfortable with the company’s market and financial position, citing its strong balance sheet and solid liquid position. The company is also winding down its fleet reinvestment program of more than 10 years, which allowed Tidewater to replace, enhance and grow its fleet and operating capabilities.

“We are committed to maintaining a young and highly capable fleet in the future, but it will not require the magnitude of capital investment that has been consumed during the past decade,” Platt said.

James C. West, senior managing director and partner with Evercore ISI, called Tidewater’s fourth quarter results “somewhat disappointing”, adding that “significantly worse results would not have surprised [them] given the rapidly deteriorating OSV operating environment.”

“An improving commodity backdrop supports our intermediate term view of the sector, but it appears that the OSV market is still searching for a bottom, and there will likely be several painful quarters ahead before the healing process begins,” West said in a May 27 report. “While our own view of increasing commodity prices supports a potential demand-led recovery materializing before 2017, severe oversupply issues make calling an intermediate-term recovery in the OSV market significantly more tenuous.”

To keep vessels utilized and cut costs, Tudor Pickering and Holt analysts said in a May 28 report that they believe Tidewater will continue to stack vessels, but scrapping across the group is needed to keep rates from trending down toward cash operating costs.