Tidewater Is Ready For High Tide Season (NYSE: TDW)
Tidewater is an offshore/deepwater OFS play that may benefit from a run up in oil prices and a hedge from downside risk.
In Friday’s ThePeachPit Model Portfolio Vo. VI report, I briefly discussed a few updates to the offshore/deepwater O&G industry as it pertains to Noble Corp. and Transocean. The industry has made a major comeback with oil prices settling in the mid-$70s-to-mid-$80s price range. As mentioned in the notes, offshore production has been gaining interest amongst the IOCs as long-cycled production offers greater stability, is modestly less capital-intensive in terms of drilling operations, and provides a strong baseline for production volumes across the industry. The level of interest in offshore has driven up rig dayrates with the first rig to surpass $500k for a short-term contract off the coast of Africa. This is a major milestone for the industry in the fight for profitability, especially Transocean and their high debt servicing load. With the broader industry remaining disciplined in managing their activated rigs while leaving cold-stacked rigs offline has created this pricing pressure as demand grows. As a result, contract duration is increasing and is being extended out near the end of the decade.
Oil producers have maintained their disciplined production approach as well in which no single producer is trying to take additional market share and risk price instability. Producers have also gotten much more creative in maximizing the value out of each well drilled, whether it’s through Oxy’s EOR or Devon’s refracking strategies. This has led to fewer onshore drilling rigs deployed in-basin. The overall industry appears to remain healthy and investors are taking notice. Despite the industry’s rocky start to the year, O&G as it falls within the S&P 500 has gained 15% YTD, surpassing every industry net of communications services, which it trails by only 2%. We may very well be positioned to see another 2021-2022 for O&G stocks as cash flow has largely translated into dividends and buybacks.
Though much of my interest remains in strategic investments across the basins, I believe that OFS, specifically offshore/deepwater, will make some major moves this year. Despite my bearish lean on Transocean for their debt-riddled balance sheet, the stock has made some major moves in recent months as a result of the growing demand for drillships. Schlumberger, Baker Hughes, and Noble Corp. have each reflected strength across their varied services to the industry, whether its drilling support, technology, or drill rigs. I anticipate this strength to continue and potentially lead to further industry consolidation and supply suppression to push up prices. This will directly translate to shareholder returns net of debt payments. We’ll be circling back to the broader industry regularly in the single-name stock report as well as the Model Portfolio report.
Offshore Oil Field Services
Have you ever been curious about how these massive offshore rigs are put in place?
It’s quite clear that this is the most logical rationale. In reality, these massive rigs are transported just like any other maritime cargo, by boat. Up until this point I have covered two offshore/deepwater OFS companies and have yet to cover one of the most important features for mobilizing these rigs. Though it appears that I am late to the party considering the share price over the last year, I do anticipate continued strengthening of the space as dayrates improve and companies begin to print cash flow.
Tidewater (NYSE: TDW)
Tidewater is in the business of servicing the offshore/deepwater oil field services companies on a global basis. Tidewater has a presence in all major oil producing regions, including the Americas, Asia Pacific, Europe, and West Africa. Tidewater’s operations support the entire exploration lifecycle, including field development, production & maintenance for the oil and gas industry. This includes towing and anchoring for offshore mobile drilling units, transportation of supplies and personnel, field abandonment, dismantlement, and restoration. The firm also operates in the development and maintenance of offshore windfarms, including performing geotechnical surveys to support windfarm construction projects.
TDW Investment Thesis
TDW shares are relatively correlated with the price of oil and have far surpassed returns on a comparative basis.
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