Size Still Does Matter In Offshore Supply

Implications: While Tidewater (NYSE:TDW) reported a year on year drop of 2.5% in earnings, the sky is not yet falling.

Analysis: Tidewater's annual earnings, net of gain-on-sale, actually increased.  The 2007 earnings included $20.8m in profits from the disposal of 14 vessels.  The 2006 results also benefited from the abnormally high day rates experienced in 4Q06 in the North Sea.

Tidewater is still the world-leader in the offshore support industry.  While competitors, such as Bourbon (Paris:GBB.PA) are expanding more rapidly and have newer equipment, Tidewater has an established market presence worldwide.  The advantages of scale enable Tidewater to have local operational control, while spreading this expense over a larger fleet.  Newer entrants in a region are at a disadvantage.

Tidewater also can easily move assets to take advantage of geographical rate differences.  While the redeployment costs are significant, the difference in 1Q08 day rates between the GOM and other regions is notable.

Some issues remain to be addressed.  An 11% fleet new order book is insufficient for the average age of Tidewater's equipment.  This concern is further magnified by the sheer size of the worldwide order book and the specter of an oversupply of latest-generation multipurpose vessels competing with Tidewater's limited vessels.  Perhaps the best way to solve this dilemma would be through acquisition.

Looking at Tidewater's annual numbers identify concerns.  While repairs and maintenance expense grew by 8.3%, reflecting the aging fleet and repair cost escalation worldwide, other numbers are more disturbing.  Labor, the single largest operational expense, grew at 14.7% and fuel at 14%.  G&A grew by 28%, accounting for nearly $28m of the overall cost expansion of $174m.

Tidewater retains many of their strengths, but certainly has weaknesses that must be addressed if they are to retain their market dominance.