Accelerating Decarbonization And Increasing Regulation Will Undermine Offshore Operations

Key Takeaways

• Global shift to renewables and technological innovations threaten demand for Tidewater’s offshore fleet, pressuring future revenue and market size.
  
• Regulatory changes, operational cost inflation, and fleet modernization needs challenge profitability and cash flow stability.
  
• Secular growth, limited vessel supply, robust contracts, and expansion into renewables position Tidewater for margin expansion, greater revenue visibility, and reduced earnings volatility.

Catalysts

Provides offshore support vessels and marine support services to the offshore energy industry through the operation of a fleet of offshore marine service vessels worldwide.

• The accelerating transition towards global decarbonization and rising adoption of renewable energy sources are likely to suppress demand for offshore oil and gas activity over the long term, ultimately eroding Tidewater’s core platform supply vessel market and putting pressure on long-term revenue generation.
  
• Technological advancements such as improved subsea processing and electrification may reduce the need for traditional offshore support vessels, shrinking the addressable market for Tidewater’s fleet and creating a structural headwind for both revenue and margin expansion.
  
• Increasing regulatory scrutiny, the potential introduction of global carbon pricing, and greater ESG compliance requirements are expected to drive up operational costs for offshore service providers, directly threatening Tidewater’s net margins and profitability in future periods.
  
• Aging fleet requirements will likely necessitate substantial capital expenditures for modernization, at a time when industry-wide oversupply is already constraining vessel utilization and day rates, creating risk of impaired free cash flow generation.
  
• Persistent volatility in global energy prices and new offshore wind entrants may increase customer focus on contract flexibility and reduce the average duration or premium terms of Tidewater’s contracts, heightening earnings unpredictability and undercutting prospects for stable long-term cash flows.

Tidewater Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tidewater compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tidewater's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.0% today to 19.6% in 3 years time.
• The bearish analysts expect earnings to reach $281.1 million (and earnings per share of $5.65) by about July 2028, up from $176.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.7x on those 2028 earnings, down from 14.5x today. This future PE is lower than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 5.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Tidewater Future Earnings Per Share Growth

Risks

• Global underinvestment in oil and gas combined with increasing challenges in accessing onshore hydrocarbons is likely to drive sustained offshore activity, which would support higher utilization for Tidewater's vessels and could contribute to topline revenue growth and margin expansion.
  
• Tidewater’s operating results are being buoyed by long-term contracts, a robust subsea project pipeline, and evidence from unchanged or growing customer commitments across multiple regions, providing significant revenue visibility and potential utilization gains for several quarters and potentially years ahead.
  
• The tight supply of offshore support vessels, minimal newbuilding activity, and continued vessel attrition are expected to reduce net vessel supply, which, in turn, should favorably impact day rates and bolster both revenues and margins for Tidewater over the long term.
  
• The company is actively modernizing and maintaining high-specification vessels, alongside pursuing strategic M&A and cost optimization; these efforts enhance operating leverage and create opportunities for both revenue growth and higher net income over the medium to long term.
  
• Secular tailwinds such as the global push for energy security, population growth, and the acceleration of offshore wind and renewables – areas into which Tidewater is strategically expanding – could enhance diversification, reduce cyclicality, and produce more stable earnings and free cash flow.

Valuation

• The assumed bearish price target for Tidewater is $31.57, which represents two standard deviations below the consensus price target of $58.17. This valuation is based on what can be assumed as the expectations of Tidewater's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $281.1 million, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 7.4%.
• Given the current share price of $51.65, the bearish analyst price target of $31.57 is 63.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.