Featured MarEx Print Article: Upgrades+Downgrades

Featured print article from the Maritime Executive November/December 2009 Dockwise edition. WORKBOAT STOCKS: Movin’ On Up? by Jack O'Connell The last time we looked, the stocks of companies like Tidewater, Bourbon and Seacor were riding high. And for good reason. Oil prices were above $140 a barrel with predictions of $200 and higher. Demand for crude was rising, along with drillers’ budgets. Rigs were everywhere, looking for more “black gold,” and every rig needed two or three work¬boats to transport food, fuel and supplies and keep the behemoths – and their occupants – fully stocked and operational. But that was a long time ago – eighteen months, to be exact. Then the world as we knew it ended, and everyone packed their bags and went home. A form of nuclear winter ensued with frozen credit markets, declining economic activity and col¬lapsing world trade. Crude prices fell to $30 a barrel and natural gas dipped below $2.50 per mcf (from a high of $15). The rigs – and workboats – were silent.

“Customer activity levels began to fall a year ago,” noted Dean Taylor, Tidewater’s Chairman and CEO, in a recent conference call, and – judging from third quarter earnings reports – they probably touched bottom this summer. Particularly hard hit were the Gulf of Mexico and North Sea. Taylor, for one, is “not convinced the recession is coming to an end” and allows as how he’s “more pessimistic about the rest of 2009 than he was three months ago.” This coming from the head of the world’s biggest workboat company is not good news. Or is it? Managing Through Hard Times Actually, these stocks have done quite well in 2009. After reaching 52-week lows in early March (along with the rest of the market), they have re¬bounded smartly and soundly outperformed the averages on a year-to-date basis (see Chart 1). The DJIA, for instance, is up about 10 percent on the year and the S&P 500 15 percent. Depends on oil prices. And Big Oil’s 2010 budgets. Yet, to paraphrase Rodney Dangerfield, workboat stocks “don’t get no respect.” Why is that? Well, for one thing, they are all “small cap” when compared with the Trans¬oceans and Chevrons of the world, with market caps ranging from just over $100 million (Trico) to over $2 billion (Tidewater). They come pretty far down on the food chain, for another, meaning they are often the last to see the benefits of an economic recovery or uptick in E&P activity. That’s because you have Big Oil at the top, controlling the dollars; the drillers in the middle, as the main subcontractors; and the boat com¬panies last, feeding off the drillers. That’s the economic reality. But the investing reality is another story. Based on year-to-date performance, these stocks have done much better than Big Oil and compare favor¬ably with the drillers. They deserve a closer look. “We have been able to maintain margins in the trough of the recession,” noted Tidewater’s Taylor, mainly through aggressive cost-cutting and the cold-stacking of idle vessels. “Our strategy is to grow earnings capacity during downturns and conserve cash for investment during upturns,” he added. Tidewater earned $98.2 million or $1.90 a share in its latest quarter, not bad for a company in the “trough of the recession.” Gulfmark Offshore, a major operator in the Gulf of Mexico and North Sea, saw revenues fall by nearly a third from a year ago due to depressed activity and lower freight rates. Gulfmark, which a year ago acquired Rigdon Marine’s modern fleet, reported that operating margins in the GOM fell to four percent in the latest quarter from 33 percent a year earlier. Similarly, North Sea margins declined to 28 percent. Yet Southeast Asia continued to perform extremely well with operating margins of 69 percent, which gives you some idea of how profitable this business can be. Through it all, Gulfmark managed to earn $12.7 million or $0.50 a share in the third quarter, a testament to management’s ongoing cost-containment program. The company also accelerated the drydockings of a number of idle vessels in anticipation of better times to come – a tactic employed by Tidewater and others as well. Seacor’s operating income from offshore operations declined by $14 million compared to the previous quarter, yet it still earned $30 million. It had 26 vessels cold-stacked, particularly in the GOM. Seacor, a diversified marine holding company, derives the largest percentage of its earnings from offshore marine services. Salvation in 2010? Bourbon’s CEO Jacques de Chateauvieux correctly predicted back in Au¬gust that in the second half of 2009 “growth won’t be as strong as in the first half.” Bourbon is the world’s second largest operator of offshore support vessels with a dominant position in the West African market. Its stock is up 47 percent this year. De Chateauvieux also noted that “From what we are hearing from oil companies there will be a pickup in activity in the first half of next year.” And that seems to be the general consensus. A quick look at oil prices shows why. After starting the year around $50 a barrel and falling to $30 in early March, they have steadily risen and now hover around $80 a barrel, well above the breakeven level for even the most expensive deepwater drilling projects. With oil demand forecast to rise in 2010 for the first time in three years and as the world economy slowly pulls out of its steepest decline since the Great Depression, prices are likely to continue on an upward path.

Oil prices are one thing. E&P budgets are another. But they usually go hand-in-hand. High oil prices mean more exploration, more drilling, more searching for new prospects. Low oil prices mean retrenchment and stagnation. On this basis, the prognosis is good. Further confirmation comes from listening in on the earnings calls of a number of drilling companies. As Tidewater’s Taylor put it, “Most are advertising better budgets for next year.” That’s good news for the workboat companies. Gulfmark’s Streeter chimes in, “Recent indications of a bottoming of jackup demand, improved post-hurricane season activity in the U.S. Gulf, and potential budgets based on higher oil prices are all suggestive of potential improvements in demand going forward.” So the stage is clearly set for a rebound in 2010. OPEC and the International Energy Agency have both raised their oil demand forecasts for the year ahead, another good sign. And unlike the dry bulk and tanker markets, there is no specter of a looming supply overhang in the workboat market. Of the roughly 2,200 AHTSs and PSVs worldwide, 840 are over 25 years old and expected to be retired, more than offsetting the approximately 600 new vessels currently under construction. And if the new CBP proposal discussed elsewhere in these pages takes effect in the GOM, that would mean additional work for U.S.-flag vessels. Who knows, a year from now we could all be celebrating!

Jack O’Connell is the Senior Editor of THE MARITIME EXECUTIVE. He is a private investor who may own shares in some of the companies mentioned in his columns. The views expressed in this column are his and his alone and are not in any way to be construed as investment advice. He can be reached with comments on this editorial at [email protected] and/or join the Maritime Executive ‘Linked In’ group by clicking HERE.