Offshore Blues

There’s not much to smile about these days in the workboat world, and there’s little relief in sight.

It’s “Blue Bayou” down on the Gulf. You remember, the song first recorded by Roy Orbison (who also co-wrote it) and later made famous by Linda Ronstadt:

I'm goin' back some day, come what may, to Blue Bayou 

Where you sleep all day and the catfish play on Blue Bayou 

All those fishin' boats with their sails afloat, if I could only see 

That familiar sunrise through sleepy eyes how happy I'd be.

The fishing boats may still be there, but workboats are nowhere to be found – except in layup. Roughly half the active fleet is currently cold-stacked or idle as owners struggle to cut costs and ride out one of the worst recessions in memory. So there’s plenty of time to sleep all day and troll for catfish ‘cause there ain’t no work to be found.

“Lower for longer” is the prognosis from my colleague Alan Brooks, quoting BP Chairman Bob Dudley, who was referring to the outlook for oil prices. But the phrase aptly describes overall market conditions as well. Have we hit bottom? Maybe oil prices have, but not conditions in the workboat world, which continue to deteriorate. In a spate of recent earnings announcements, oilfield service companies are uniformly forecasting worsening conditions in the year ahead as the world remains awash in oil and new boats continue to be delivered into a market that is already oversupplied.

In any event, the eventual recovery is likely to be, in Allen Brooks’ estimation, U-shaped (“a bathtub recovery”), meaning we’ll crawl along the bottom before starting to go up. Or, worst case, it could be L-shaped, meaning we just crawl along the bottom with no recovery at all. Which feels like where we are now. Sorta like the global economy. Ouch. 

Global Phenomenon

It’s not just the Gulf, of course. In the North Sea, Vroon Offshore announced the layup of 12 vessels “as a direct result of the slump in offshore oil and gas activities.” An unspecified number of older vessels will also be scrapped. Vroon has a 90-vessel fleet and stated in its press release, “We deeply regret the corresponding reduction in onboard positions and the consequences this has for our colleagues.”

The pain extends to shipyards as well, who are experiencing cancelled orders or delivery delays as a result of the global slump. Singapore-listed Vard Holdings, a unit of Italy’s Fincantieri Group, issued a profit warning for its fiscal third quarter and full year as a result of operational difficulties in Brazil, where the latest round of bidding on offshore leases drew minimal interest. Who wants to invest in Brazil these days, anyway? Nobody. It’s too risky, and too expensive. Amazing to think that it wasn’t so long ago that Brazil – and Petrobras – were the darlings of the offshore world.

Oilfield services giant Schlumberger, which has its hands in everything from boats to rigs to subsea services and pipelaying and decommissioning and you name it, saw its third-quarter revenue plunge by a third from a year ago. A third! From roughly $13 billion a year ago to $8.5 billion this year. How would you like to have your income cut by a third? The company cited  the continuing trend of “exploration rigs transferring to drilling and completion activities,” meaning no new business.

Summing up its results, Chairman & CEO Paal Kibsgaard said, “The business environment deteriorated further in the third quarter. However, the cost reduction actions we took in previous quarters and the acceleration of our transformation program enabled us to protect our financial performance in what is shaping up to be the most severe downturn in the industry for decades.”

In what is shaping up to be the most severe downturn in the industry for decades. That pretty much sums it up, doesn’t it? The message is clear, and if you need further confirmation I suggest you read Wendy Laursen’s fine contribution, “Batten the Hatches,” elsewhere in this edition.

The Long View

So let’s take a look at some of the publicly traded companies in the offshore space and see if there’s opportunity. For value investors, of course, this is a great time to invest as all of these stocks are trading at multiyear lows. “Buy when everyone else is selling, and sell when everyone else is buying” – that’s the mantra of the value investor, isn’t it? And it’s clear from the chart in this article that nobody is buying these stocks.

SEACOR Holdings was the best performer among the group, if you can call a 24 percent decline in market value year-to-date “best.” SEACOR’s founder and long-time Chairman, Charles Fabrikant, is a firm believer in the value approach, and he manages the company’s assets accordingly.

Summing up the company’s third-quarter results, he observed: "The quarter and year-to-date results reflect extremely difficult conditions in our offshore marine services business. Notwithstanding the challenges, our offshore business, as well as all of our other businesses, continue to produce positive cash flows from operations. Our offshore group's results have benefited from a fleet and geographical exposure that is diverse with minimal investment in boats that are highly dependent on deep water exploration activity.”

Note that last sentence. The offshore group’s focus, unlike most of its competitors, is away from the deepwater, which has suffered disproportionately in the current downturn. Why? Because it costs more to drill in the deepwater, a lot more, and that’s hard to justify with oil trading below $50 a barrel.

SEACOR did manage to eke out a small profit in the quarter although its year-to-date results are negative. The profit was largely the result of strong performances in its coastal tanker and inland barge businesses, reflecting Fabrikant’s belief in diversification as a means of cushioning downturns. Like his better-known counterpart in Omaha, Fabrikant is a firm believer in cash being king: “We adhere to our focus on maintaining a strong liquidity position, which we believe will serve us well in the current market environment and lead to opportunities.” As for what the future holds, he stated: “We expect market conditions in the offshore marine business to deteriorate further over the next several quarters and plan on taking further measures to reduce costs." Translation: Conserve cash and wait for the inevitable turnaround.

Industry-leader Tidewater, on the other hand, is bearing the full brunt of the global downturn. Its stock is down 65 percent year-to-date, to some $11 a share. Scary, isn’t it, to think that the company with arguably the best assets and arguably the best management in the business could be so hard hit? But that’s part of the risk in being a “pure play” with all your eggs in one basket. You go up the most in the good times and down the most in the bad times. The same analysis applies to Gulfmark and Hornbeck, both of whom have first-class assets and first-class management but whose stocks have been pummeled. There was a time in the not-too-distant past when all three of these companies were trading above $40 and even above $50.

But back to Tidewater. As pointed out by Cowen & Co. analyst J. B. Lowe in an excellent report, “Tidewater and its employees have been through every market condition that the offshore oil and gas sector has ever encountered: the company literally invented the OSV industry in 1956, when it constructed the first work boat purpose-built to service offshore oil and gas operations. CEO Jeff Platt alone has survived five separate downturns during his career. Given management's experience, the company's global operating footprint and long track record of success, we remain confident that Tidewater will emerge from the current downturn in a stronger position than its peers, leading to potential outperformance during the subsequent upturn.”

Underlying his conviction, Lowe has an Outperform rating on the stock and a $20 price target.

But that was in mid-September. Two more months have passed. The seasonally weak winter season will soon be here, adding to the industry’s woes. Meanwhile, Tidewater reported a modest loss in its most recent fiscal quarter – results that Lowe described as having “modestly negative implications.”

Playing It Safe

So what’s a poor investor to do when even a company like Kirby Corporation, one of this writer’s long-time favorites, is having a tough time of it? A year ago the company, which has a dominant inland tank barge business and one of the biggest coastal tank barge fleets, was trading at $106. Today it’s trading at $67. Kirby reported decent third-quarter earnings of $1.04/share but revised downward its full-year guidance.

Analyst Kevin Sterling at BB&T Capital Markets has lowered his rating on the stock to Hold but remains optimistic going forward: “Long-term, we continue to believe that Kirby is well-positioned to leverage improving tank barge fundamentals (petchem cycle ramping), but at this time we find it prudent to remain on the sidelines until capacity rationalizes and the pricing outlook improves. In the meantime, we remain encouraged by management’s willingness to buy back stock.”

So there you have it: Remain on the sidelines until capacity rationalizes and the pricing outlook improves. Works for me. Thanks, Kevin! – MarEx

Workboat Stocks

                                                12/31/14 Price           Recent Price               YTD Change               

SEACOR (CKH)                              $73.81             $56.37                         -24%

Hornbeck (HOS)                               $24.97             $14.06                         -44%

Tidewater (TDW)                             $32.41             $11.21                         -65%

Gulfmark (GLF)                               $24.42             $  6.22                        -75%