Offshore Support Vessels Will Shrink Although Scarcity May Stabilize Rates

Key Takeaways

• Decarbonization trends and stricter emissions mandates threaten demand and profitability for Tidewater's offshore support vessel operations.
  
• Limited diversification and industry overcapacity expose Tidewater to volatile earnings and diminished pricing power as competition intensifies.
  
• Tight global vessel supply and rising demand position Tidewater to achieve stronger margins, better utilization, and pursue growth opportunities through M&A and capital returns.

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 global shift towards renewable energy and intensifying decarbonization efforts threaten the long-term relevance of offshore oil and gas activity, which could steadily erode demand for Tidewater's core offshore support vessel business, placing persistent downward pressure on revenue and vessel utilization in the coming decade.
  
• Regulatory and social mandates targeting carbon emissions in the maritime and oilfield sectors are expected to drive substantial increases in compliance costs, capital expenditures related to fleet upgrades, and operational barriers, leading to potential contraction in net margins and diminished free cash flow.
  
• Rapid technological advancements such as automation, digitization, and artificial intelligence are lowering barriers to entry and operational costs for competitors and customers alike, forcing Tidewater to invest heavily simply to maintain status quo competitiveness, which ratchets up industry-wide capital intensity and compresses margins over time.
  
• With Tidewater's business highly concentrated in offshore support vessels and lacking diversification beyond this segment, sustained periods of weak offshore exploration and development activity will leave the company exposed to prolonged declines in revenue, particularly if offshore drilling remains subdued as the global energy mix shifts.
  
• The industry's inherent cyclicality and ongoing global oversupply of offshore vessels create a structural ceiling on day rates and vessel values, undermining Tidewater's pricing power and increasing the risk of future earnings volatility, especially as larger and more technologically advanced competitors consolidate market share.

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 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.6% today to 19.2% in 3 years time.
• The bearish analysts expect earnings to reach $274.9 million (and earnings per share of $5.66) by about August 2028, up from $198.9 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 6.9x on those 2028 earnings, down from 14.3x today. This future PE is lower than the current PE for the US Energy Services industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 5.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Tidewater Future Earnings Per Share Growth

Risks

• Global vessel supply remains tight with minimal new build activity projected until at least 2027, which, combined with ongoing vessel attrition, is likely to result in persistent vessel scarcity and support strong day rates, driving higher revenue and improving net margins for Tidewater in the coming years.
  
• Secular demand trends-including robust offshore production, subsea construction, and expected rebound in drilling from 2026 onwards across Africa, the Americas, Asia Pacific, and the Middle East-point to higher utilization and increasing contract opportunities, providing a stable foundation for earnings growth.
  
• Tidewater's modern and young fleet, bolstered by strategic reinvestment in drydock, maintenance, and upgrades, is well-positioned to command premium pricing and better utilization than older competitors, likely to protect and expand gross margins over the long term.
  
• The company's revamped capital structure, increased financial flexibility, and significant liquidity-underpinned by a low net leverage target and new revolving credit facility-enable the pursuit of accretive M&A and sustained shareholder returns, which may directly enhance both revenue and earnings.
  
• Announced share repurchase program, combined with consistent free cash flow generation exceeding $100 million per quarter, signals strong management confidence in the durability of the business, supporting both share price resilience and the potential for net margin expansion through reduced share count.

Valuation

• The assumed bearish price target for Tidewater is $36.91, which represents two standard deviations below the consensus price target of $61.67. 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 $35.0.
  
• 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 $274.9 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $57.41, the bearish analyst price target of $36.91 is 55.5% 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.