Upgrades & Downgrades: Workboats Rising
It's time to look at workboat stocks again.
(Article originally published in Sept/Oct 2022 edition.)
It’s been a long time since we last visited the offshore workboat market, and for good reason. Nothing but bad news. Plunging day rates, too many vessels, a shrinking rig fleet, layoffs, false recoveries, bankruptcies and liquidations. It’s been that way for the last eight years.
But something’s changed, and there’s a new feeling of optimism in the Oil Patch, as witnessed by this edition’s cover story. Laborde Marine is on a roll, and it’s not the only one. Why? Because fossil fuels are once again in demand as the world recognizes the limitations of renewable energy and the continued need for steady, dependable sources of power. Which means fossil fuels. The war in Ukraine has, of course, added urgency to the situation by cutting off much of Europe’s natural gas supply and forcing it to look elsewhere for substitutes.
All of which is good news for countries like the U.S., which can’t produce LNG fast enough to satisfy surging European and global demand. And that applies to other fossil fuels as well. With gasoline prices worldwide at record levels, there’s plenty of incentive to search for more oil. Even President Biden, clean energy advocate that he is, recognized this when he signed into law the Inflation Reduction Act, which provides – among other things – for additional oil and gas leasing in federal waters.
Even much-maligned coal is benefiting. The sharp rise in natural gas prices resulting from Russia’s shutdown of Nordstream 1 has made coal once again attractive as a power source. Countries like Germany and the U.K. are busy restarting shuttered coal plants, and U.S. exports of thermal coal are nearing a record.
The result is a windfall for energy companies, which have suffered through years of underperformance and investor scorn, driving down their stock prices and leading to underinvestment in new fossil fuel projects. Today, with oil and gas prices once again sky-high, Exxon announced earnings of $17.9 billion in its fiscal second quarter while Chevron came in at $11.6 billion and Shell at $11.5 billion – princely sums, to be sure, but consider that Apple made $19.4 billion and Alphabet (Google) $16.0 billion in the same period on much lower revenue.
“With volatile energy markets and the ongoing need for action to tackle climate change,” stated Shell’s CEO Ben van Beurden, commenting on second quarter results, “2022 continues to present huge challenges for consumers, governments, and companies alike. Consequently, we are using our financial strength to invest in secure energy supplies which the world needs today, taking real, bold steps to cut carbon emissions, and transforming our company for a low-carbon energy future. And, crucially, our Powering Progress strategy is delivering strong results for our shareholders on the back of years of portfolio high grading, combined with robust operational performance.”
Invest in secure energy supplies which the world needs today – that means oil and gas. Taking real, bold steps to cut carbon emissions, and transforming our company for a low-carbon energy future – that means renewables like wind and solar. Like other Big Oil company CEOs, van Beurden faces the challenge of managing his company through the transition from fossil fuels to renewables – a long-term process requiring skill and balance between old and new. Right now the focus is on the old (fossil fuels) while continuing to invest in the new (renewables).
Shareholders are benefiting. Shell’s stock (SHEL) is up nearly 20 percent this year. Chevron (CVX) is up 30 percent, and Exxon (XOM) a whopping 45 percent – all of this in a down market. As my esteemed colleague Allen Brooks keeps pointing out, energy is the best performing sector of the S&P 500 this year – up 40 percent while the overall market is down 20 percent. Adding icing to the cake is the fact that all three of these stocks pay attractive dividends as well – close to four percent. Can’t do much better than that! (Is that an ESG investor I hear grumbling in the background?)
All of which is good news for the workboat industry.
“We believe the second quarter of 2022 marks the inflection point in the industry that we have long awaited and is now evident in our financial performance,” gushed Quintin Kneen, Tidewater’s President & CEO. “Revenue, gross margin, average day rate and utilization all improved meaningfully during the second quarter as the building momentum in offshore vessel activity reached critical mass.”
Tidewater, of course, is the big kahuna in offshore workboats and a bellwether for the industry. If Tidewater says things are getting better, then things are getting better.
“The average day rate improved by nearly $1,900 per day sequentially,” Kneen added, “which is in excess of the improvement we would typically expect to realize over the course of an entire year in a normal market upcycle. Vessel level cash margin improved to 38%, up approximately four percentage points and continuing to meaningfully outperform the 30% target we have discussed in recent quarters. These improvements during the quarter, particularly the move in day rates, speak to continued demand growth as offshore activity continues to increase and as the vessel supply fundamentals continue to work in our favor given the shortage of available vessels on the market today. We expect activity to continue to improve throughout the remainder of 2022 with another likely step-up in 2023.”
We expect activity to continue to improve throughout the remainder of 2022 with another likely step-up in 2023. Well, hallelujah, break out the champagne, time to celebrate! The eight-year drought is over, and happy times are here again.
The company is still losing money on a pro forma basis – $25.6 million in the second quarter, but that should soon change. Revenue and cash flow are up sharply as is the all-important EBITDA metric (earnings before interest, taxes, depreciation & amortization). The global supply boat market is at last coming into balance, and high oil prices mean continued strong demand for workboats. Tidewater stock (TDW), meanwhile, has more than doubled this year and currently trades in the mid-20s.
Results at SEACOR Marine Holdings (SMHI) confirm the overall positive outlook. While much smaller than Tidewater, it’s one of the few remaining publicly traded offshore workboat companies still around, and you can buy its stock for a measly $6/share. And if you had bought its stock at the beginning of the year, you’d have more than doubled your money by now. But who knew? A great meme-stock candidate too – why haven’t Robinhood investors caught on?
Anyway, SEACOR reported its highest utilization rate in eight years during the second quarter as well as a 26 percent jump in year-over-year revenues. Like Tidewater, it’s still losing money on a pro forma basis – due largely to heavy drydocking costs – but is equally upbeat about the future.
“Our results for the second quarter demonstrate the continued progress we have been making in increasing revenues, utilization and average day rates, reflecting the continued buildup of demand for our services,” commented CEO John Gellert. “Excluding major repairs and drydocking expenses in both periods, the fleet had a 32% improvement in DVP [direct vessel profit] compared to the second quarter of 2021. We expect our overall financial performance to continue improving as repairs for these large liftboats and regulatory inspection cycle are completed, which should place us in a timely position to participate in attractive contracting opportunities.”
Third-quarter results will be out shortly, so stay tuned.
Road to Recovery
It’s been a long, hard road, all right, for oilfield service vessels, punctuated by a series of restructurings and consolidations. Tidewater went through its own Chapter 11 filing five years ago, shedding much of its debt and emerging with a cleaned-up balance sheet. Then it merged with Gulfmark Offshore, which had gone through its own bankruptcy filing, in 2018, marking what Kneen, then the head of Gulfmark, called “an important first step” in the consolidation process.
Consolidation continued earlier this year when Tidewater acquired Swire Pacific Offshore, an important player in the Southeast Asia market. SPO accounted for roughly 25 percent of Tidewater’s second-quarter revenue and generated a cash margin in line with the overall fleet margin of 38 percent – a healthy number. With a growing cash pile and plenty of attractive candidates around, you can be sure Tidewater will be looking for additional acquisition opportunities going forward.
As for the rest of the industry, bankruptcies claimed Farstad, Hornbeck, Bourbon and dozens of smaller companies, most of whom emerged – like Tidewater – relatively unscathed and in better financial shape, or – like Gulfmark – as part of a bigger company, or – like Hornbeck and Bourbon – as private companies. Others just went out of business, their fleets sold for scrap or repurposed. And a very select few, like industry stalwart and privately held Edison Chouest, needed no help at all and survived on their own.
The net result was a dramatic shrinking of the global fleet, a necessary first step on the road to recovery. Other steps followed, including retiring old vessels and looking for new sources of revenue – like offshore wind. Paris-based Bourbon, in particular, which underwent a spectacular downfall three years ago, having once been the world’s biggest offshore vessel company, is now heavily into offshore wind in Europe, where there’s plenty of business to go around.
That business is just taking hold in the U.S., where Tidewater – among others – sees significant future opportunity and Edison Chouest is building the first Jones Act-compliant windfarm SOV (service operations vessel), which will be chartered to Empire Wind and based at the South Brooklyn Marine Terminal in New York upon completion in 2024. Appropriately, the vessel is a plug-in hybrid capable of running on battery power alone.
Jack O'Connell is Senior Editor of this magazine, a former maritime executive, and a private investor who may own shares in some of the companies mentioned in his columns. The views expressed are his and his alone and are not in any way to be construed as investment advice.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.