OSV's look for calmer economic waters

by John Snyder
Senior Editor

Right now, offshore service vessel operators are weathering some pretty choppy seas. Just ask Tidewater, the world's largest operator of offshore marine service vessels.

"These earnings are disappointing," Tidewater's chairman and CEO Dean E. Taylor told analysts in discussing the company's results for its fiscal second quarter ending September 30 during a conference call last month.

For the quarter, Tidewater Inc. , New Orleans, had net earnings of $12.3 million, or $0.22 per share, on revenues of $164.2 million. For the same quarter last year, net earnings were $23.4 million, or $.41 per share, on revenues of $158.6 million. Net earnings in the immediately preceding quarter ended June 30, 2003, were $18 million, or $0.32 per share, on revenues of $164.8 million. The earnings were in line with an earlier guidance Tidewater put out to analysts.

Taylor put the blame squarely on an "unforeseen fall off" in utilization in the international markets, where 337 of Tidewater's 570 offshore marine service vessels are employed. Lower utilization for Tidewater's supply and towing supply vessels in Nigeria, Venezuela, and Brazil, negatively impacted international vessel revenues and profitability. Additionally, continued weakness in the Gulf of Mexico drilling market resulted in an operating loss from domestic operations in the second fiscal quarter, despite significant cost cutting efforts that took place during the quarter. Tidewater expects to reap the full financial impact of its cost cutting measures in the fiscal third quarter. Tidewater has not posted a profit in the U.S. Gulf of Mexico market since the quarter ending March 31, 2002.

Overall revenues in the Gulf were up in the quarter $2.5 million, but "were still weaker than we'd like to see," said Taylor.

Worldwide vessel operating costs were higher than the June 30, 2003 quarter as a result of higher drydocking costs and incremental costs related to new vessels delivered at the end of the June 2003 quarter and during the September 2003 quarter. Tidewater drydocked 29 vessels at a cost of about $9 million for the quarter, up from 21 vessels at a cost of $6 million during the last quarter. Additionally, vessel operating costs rose to $103.9 million in the quarter ending September 30, up from $90.2 million All of these factors cut into earnings.

OUT WITH THE OLD

The weakness in the international and Gulf of Mexico markets comes at a time when Tidewater is in the midst of transforming its aging fleet. And that transformation has not been easy. In Fiscal Year 2000, 509 vessels built prior to January 2000 with an average age of 19 years old contributed 100% to Tidewater's profits. In Fiscal 2003, 435 of those vessels with an average age of 22 years contributed to 75% of profits, while the remainder was generated by 54 vessels with an average age of 3 years old that were built or acquired after January 2000.

Since January 2000, Tidewater has ordered 93 new vessels at a cost of $1.15 billion. To date, it has taken delivery of 79 vessels at cost of $750 million paid from cash flow. Another 24 vessels are under construction worldwide It will add 15 of those vessels over the next six months, including three from its Sanko acquisition.

Over the last five years, Tidewater has sold 191 vessels and scrapped another 44.

"We continue to renew our aging fleet," said Taylor. "That's where the future profitability of this company will come from. The global fleet is aging rapidly. Many customers are placing age restrictions on vessels. We expect this trend to continue. They want better equipment. The big guys are going to continue to demand better and better equipment," he said.

In the quarter ending June 30, Tidewater's deepwater OSV fleet in the Gulf of Mexico earned an average day rate of $13,300, with a utilization rate of 68%. In the quarter ending September 30, day rates averaged $12,650 with 84.3% utilization. The rise in utilization was in part due to the acquisition of ENSCO's "stretched"fleet.

The remainder of the fleet in the Gulf earned an average day rate of $5,470 with a utilization of 24.1% in the quarter ending June 30. In the quarter ending September 30, the average day rate crept up to $6,125 with a utilization rate of 20.6%.

Internationally, Tidewater's vessels had an average day rate was $6,011 with a utilization rate of 67.8%. This compared with an average day rate of $5,904 and utilization rate of 72.4% in the quarter ended June 30.

Going forward, Taylor still sees Nigeria and Venezuela as question marks, but feels bullish about Brazil and Mexico.