Over the last couple of months, I have been unabashedly bullish on the offshore sector. My favorite has been Transocean (RIG), which has a ton of torque due to the leverage on the balance sheet. I also recently added Tidewater (NYSE:TDW), which I think also has significant upside for investors buying today. I think the whole industry is on a cyclical upswing, and I think the trend of rising daily rates is going to continue for a while. Today I will go into the recent acquisition of 37 ships from Solstad Offshore and talk about where I think the sector is headed.
Investors familiar with the offshore sector will remember the carnage of the last decade, which saw oversupply across the sector. Combined with falling oil prices, this created a toxic combination that led to numerous bankruptcies, including Tidewater. Transocean was a survivor, which is why they have a heavy debt load today. Over the last year, things have started to turn for the sector as the world started to look for where the next barrel of oil will come from.
I won’t go into too much detail here, but the situation in Russia and Ukraine creates questions about Russian energy, and I have seen pieces saying that Saudi Arabia can’t ramp up production, and speculation that the Permian Basin’s best days are behind it. Over the last six months, day rates for the offshore sector have started to tick up, and the supply/demand picture for rigs and offshore service vehicles looks very favorable for companies in the sector and investors looking at the companies.
Tidewater was the largest player in the offshore service vehicle space, and their newest acquisition adds to an already impressive portfolio of assets. It’s their second acquisition in as many years, and I think both will turn out to be very rewarding for investors. While some investors might be reluctant to chase a stock that is up 50% YTD and 190% in the last year, I still think the risk/reward for investors buying Tidewater is very good today. Companies like Tidewater and Transocean aren’t buying and holding forever stocks, but I think the one to three year returns could be very attractive due to the cyclical upswing in daily rates in the sector.
Shares of Tidewater were up almost 6% today (it’s Tuesday March 7th as I write this) on the announcement that they were acquiring 37 OSVs from Solstad Offshore. The acquisition is expected to close by the end of Q2 as long as they can get regulatory approval. To fund the acquisition, the company will be using a combination of their new three-year, $325M credit facility, new debt financing, and cash on hand. They agreed to pay $577M in cash, which I think will look like a steal in a couple of years.
Above is a quick overview of the newly acquired assets. Most of the ships are in Europe, but if you are as bullish on offshore as I am, adding 37 ships at about one third of the estimated replacement cost is just another reason to be bullish on Tidewater. I wanted to include a couple of chunks of my last article from January, as I think they both apply today.
They also grew significantly in 2022, primarily due to the acquisition of Swire Pacific Offshore Holdings, which in my opinion, is going to look like a steal in a couple of years. The acquisition, which cost $215M ($42M in cash) and closed in April, allowed Tidewater to add 50 OSVs…
What I will say is that with Tidewater’s assets, improving operating environment, and solid balance sheet, the stock is a steal with a market cap just over $2B. I don’t think it is quite as undervalued as Transocean, but they also don’t have a debt load that creates additional risk. While it’s hard to buy a stock that has run the way Tidewater has, I still think the rally has legs.
Like I said last time, trying to put a precise valuation on a company like Tidewater is difficult. The fluctuation of day rates will have a massive impact on the profitability of the company, but my base case is that day rates continue to trend higher. I skimmed the 10-K, and the company’s balance sheet is in good shape. It takes some time to understand the supply and demand picture in offshore, but the setup is still asymmetric in my opinion.
There are several reasons for this. One is the replacement cost of the assets. It would take a massive investment today to build new ships or rigs. Companies won’t go to shipyards to build new ships or rigs until they are incentivized to with much higher day rates. I have seen several estimates on this (50% higher or more), but I think we won’t be seeing any supply come online anytime soon. If we do start to see some new investment, it will take at least a year to build a new ship and much longer for a rig for a company like Transocean.
Like I said earlier, Tidewater, Transocean, and other companies in the sector are not buy and hold forever investments. I’m looking at it with a one-to-three-year time frame right now, but I might end up holding onto them for longer depending on how things go. The industry is seeing a cyclical upswing which should last for some time simply due to supply and demand, and I think it will be an ideal operating environment for companies in the sector. I’m a huge fan of Tidewater’s newest acquisition, especially because they paid in cash and didn’t have to dilute shareholders.
Shares have had a massive run, but I still like the risk/reward for Tidewater and others in the sector, especially compared to broader markets. Investors looking outside of the typical energy plays might want to consider Tidewater or other companies in the sector depending on what they are looking for. Tidewater pulled off a heist last year with the Swire Pacific Offshore deal, and it looks to me like they did it again this year with Solstad Offshore.