Earlier in the week, we looked at the world’s largest offshore support vessel (OSV) owner, Tidewater, which has established a formidable position in the market for both platform supply vessels (PSVs) and anchor handling towing supply (AHTS) vessels. The company operates 192 such vessels amongst its total fleet of 213 ships, the balance of the fleet being fast crewboats, maintenance boats, and offshore tugs.
If you owned Tidewater shares over the last few years, you have experienced a rollercoaster of euphoria and then disappointment, with the shares increasing 1,000 per cent between January 2022 and May 2024, only to fall by nearly half since then.
When the company announced its third quarter results last Thursday afternoon, the market hated the news – Tidewater shares were down 12 per cent on Friday to close at US$56.11, a 15-month low.
By Monday afternoon they were trading even lower, at US$54. Some of this was attributed to comments in the results announcement about a potential slowing of the offshore market and “concerns around slower acceleration in oil demand driven by lower-than-expected growth in China and geopolitical events as well as the growth in non-OPEC oil supply.”
I don’t believe that uncertainty over the oil price is anything new, nor do I buy the story that a few ill-timed dockings and project delays lie at the root of the markets disappointment with the results.
Tidewater has simply run out of momentum. In late 2023, we argued that “momentum, momentum, momentum” would sustain the company in 2024.
Tidewater is a transparent public listed company, so its regulatory filings with the SEC provide a window into the company’s business and its newly revamped Investor Presentation sets out what it perceives as its strategic advantages. One of the SEC filings contains a detailed breakdown of regional profitability, the other a detailed snapshot of the company’s utilisation, costs and revenues by vessel category.
Let’s take a deep dive into the results and examine four uncomfortable home truths which Tidewater needs to confront.
Tidewater drove up day rates for its ships following the Russian invasion of Ukraine. It used the acquisition of Swire Pacific Offshore’s fleet of 50 vessels in 2022 and of 37 PSVs from Solstad in 2023 to establish a dominant position in both the North Sea and West Africa, and generated a virtuous circle.
Vessels acquired rolled off contracts on low rates and were quickly contracted again at much higher market rates. Activity was rising sharply, oil companies needed ships, and Tidewater had the largest market share and was bold enough to increase prices. As its fleet grew through the acquisitions, revenue grew faster than the fleet growth as both utilisation and day rates rose sharply.
In the OSV business higher utilisation actually reduces costs as the charterer is paying for fuel, water, port fees, and other charges when a ship is on-hire, which the owner bears when a vessel is off-hire.
Tidewater reported only a US$1 million rise in revenue for the third quarter compared to the second.
However, the third quarter contained 92 days, and the second quarter only 91 days, which means that for the first time in four years, unfortunately, revenue per day for the company dropped in the third quarter. Vessel utilisation fell from 80.7 per cent to 76.2 per cent.
Similarly, not only was Tidewater’s third quarter profit of US$46.4 million below the second quarter profit of US$50.4 million, it was also below the second quarter profit of US$47 million, and the newest results in the most recent quarter were flattered by a one-off foreign exchange gain of US$5.5 million, when the preceding two quarters saw foreign exchange losses.
I have a suspicion that Tidewater’s strategy of simply raising rates has played out, at least for the next year, in several important regions and categories. And in two key regions, utilisation is likely to be hit in the coming quarters.
In its Investor Presentation, the company boasted that across most categories of vessels, its “leading edge term contract day rates” continued to rise. Tidewater defines this as the rates for time charters with a contracted duration of approximately two months or longer.
The company explicitly excludes spot charter arrangements from the numbers – just as well in light of the spot charters the company has been fixing in the North Sea at less than US$6,000 per day for its largest and highest specification PSVs.
There is a little dissonance just looking at these figures against the figures quoted by reputable ship brokers with specialist regional knowledge of individual markets and segments.
Very few fixtures are being reported at these high levels for medium-sized PSVs and medium-sized AHTS in the Middle East, South East Asia, India, West Africa, or the Mediterranean, not by Seabrokers, Fearnleys, Braemar, or regional specialists like Chart for West Africa or M3 for Asia.
Yes, charters in Brazil and Australia are being secured at higher levels than those supposed leading edge numbers, because those are specialist markets with much higher operating costs.
In Asia-Pacific, Tidewater operates only twenty vessels, and so even one or two vessels switching from low charter rate contracts in Malaysia, Vietnam, and Thailand to Australian charters with full Australian crew has a big impact on average rates and “leading edge” fixtures. This is important to such an extent that without knowing how many vessels are in Australia in a given quarter, comparisons of “average day rates” become meaningless for the Asia-Pacific region.
When we look at page 31 of the 10-Q filing, we do indeed see a note that Tidewater’s revenue increase in Asia-Pacific was “primarily driven by the significant increase in average day rates due to an increase in the proportion of vessels working in Australia where average day rates are higher.”
An acquisition in Brazil would also further muddy the waters on this metric, another argument in favour of another Pac-Man move from Houston, as day rates there are similarly high (as are costs). We looked at three possible acquisition opportunities for Tidewater in Brazil in Part One of this piece.
Tidewater emphasises that its rates are continuing to rise across the board in its investor presentation even as its own SEC filings show that in the third quarter, in many segments and geographies, average day rates were flat or even falling.
There may be a mathematical explanation for this anomaly if lucrative spot charters ended and the vessels did not refix, whilst long-term, low-rate term fixtures continued, dragging down or flattening the average.
Consider the average charter rates across the regions for large PSVs of more than 900 square metres clear deck reported on page 27 of the 8-K form. Here, Tidewater presents those average charter rates by region, mixing new contracts and old contracts, whilst stating in its investor presentation that leading edge day rates for the category rose six per cent quarter on quarter.
Indeed, the company has shown rising rates across this key category over the past two years, as old contracts expired and rates increased when the ships were fixed again at market rates. Bear in mind that Tidewater's average day rate for a large DP2 PSV with clear deck space of over 900 square metres in 2021 was just US$14,382. What has been achieved has been incredible, and I don’t see rates returning to 2021 levels – but I do see perhaps a plateau in 2025.
Indeed, average day rates for large PSVs fell in the Americas and West Africa (see below table with data gleaned from Tidewater's 8-K filing).
| Region | Number of ≥900m2 Tidewater PSVs in 3Q 2024 | 3Q 2024 average day rates in US$ | 2Q 2024 average day rates US$ | Percentage change quarter on quarter |
| Americas | 10 | 35,404 | 35,490 | -0.24% |
| Europe | 40 | 21,092 | 20,686 | 1.96% |
| Middle East | 1 | 15,079 | 14,936 | 0.96% |
| West Africa | 9 | 31,118 | 31,231 | -0.36% |
| LEADING EDGE | 37, 283 | 35,172 | 6.00% | |
If the company’s actual average day rates are falling in key regions and its overall revenue is also falling, it is not clear to me for how much longer Tidewater can claim that its leading-edge rates are rising.
This is reinforced by the dismal performance of two key regions that threaten to drag down the next couple of quarters.
When we looked at Tidewater’s results from the third quarter of 2023, we were quick to use a blunt analogy to the ongoing losses in its Middle Eastern region (primarily Saudi Arabia, Qatar and Abu Dhabi):
“When you think of Tidewater's Gulf operations, think of a fifth of the company's fleet as locked into an abusive relationship with a cruel and powerful Arab sheikh who has metaphorically chained the company (and its competitors) to a drainpipe in a dark, dank, and very unprofitable basement.”
Then, the 45 Tidewater vessels working in the Middle East made a loss of US$1.1 million. This last quarter, Tidewater lost “only” US$900,000 in the region with 43 vessels in service, an improvement on the second quarter loss of US$1.8 million.
The company managed to raise its average day rates there to US$11,661 up US$513 on the preceding quarter, but two years into a resurgent OSV market, the Gulf as a whole remains unprofitable.
All those people who flew to the massive Adipec exhibition might have wanted to look in the dark, dank basement at the economics the event’s main sponsor, ADNOC of Abu Dhabi, imposes on those subcontractors it doesn’t directly own.
The situation in the Gulf looks weak for the next year following the decision by Saudi Aramco to suspend 27 jackup rigs with rumours that a further five will be suspended soon. Don’t count on Tidewater making any money from its 43 ships there anytime in the near future.
This wouldn’t matter if Tidewater’s second largest region was not also facing a crisis.
The acquisition of Solstad’s 37 PSVs in 2023 suddenly made Tidewater a major player in Europe in a way it had not been before.
At the end of 2021, Tidewater had only 20 active vessels in Europe. Europe had the smallest fleet amongst the regions the company broke out in its 10-K filing, as well as the second smallest revenues. Tidewater scrapped or sold a lot of its older diesel-mechanical PSVs in the North Sea and its old UT722 design anchor handlers there in the downturn.
Today, Tidewater operates 51 vessels in the region, and makes nearly US$1 million a day in revenue there (US$85 million in the quarter). Europe is home to the company’s second largest fleet and its most technologically advanced ships, and the region produces the company’s second largest revenues (behind West Africa).
We had already highlighted in September that the North Sea had been unusually weak over the summer. As a result, the operating profits for Tidewater’s fleet there fell 18 per cent from the second quarter to the third, to just US$12 million, worse than the Americas, Asia, and West Africa.
As we observed two weeks ago, the North Sea spot market over the autumn got worse, much worse, than it usually does in October, ahead of the five month blackspot of bad weather and reduced activities over winter.
As early as last month, Tidewater and Seacor were making fixtures of high-specification PSVs from Aberdeen below US$6,000 a day, most recently Swift Tide on November 6 with Enquest. With 11 PSVs prompt in Aberdeen and another 8 idle in Norway across all owners, there is no prospect of relief, unless vessels are scrapped, laid up or expensively relocated to other regions.
Tidewater has a lot of ships on term charter in the North Sea, a diversified geographical base within Europe, and so it is much more shielded from the ravages of a weak spot market than many of the Norwegian speculators, such as Atlantica or the HM fleet.
Golden Energy Offshore Services showed the perils of spot market dependence when it reported a loss for the third quarter of NOK49.5 million (US$4.5 million). Shareholders Pelagic Partners and their private equity friends are paying the price for reliance on the North Sea.
Unfortunately, a weak spot market also puts pressure on term fixtures in Europe. With a poor summer just gone, a stagnant rig count, tax uncertainty in the UK sector, and an awful winter ahead for spot players, the balance of power has switched to charterers in Europe.
Tidewater can expect no relief in Europe in 2025. Either utilisation will fall, or day rates will fall, or both, and remedies like moving ships to other markets will involve a short-term hit to earnings, which might be embarrassing for Tidewater management. Worse, repositionings might also put rates in other regions under pressure, creating a grim domino effect. Let’s not go there.
A quarter of the Tidewater fleet is exposed to Europe, a fifth to the Middle East. Quarter on quarter profits in the Americas fell 10 per cent. The 20 ships in Asia-Pacific are too few to move the dial and that region is very dependent on vessels working for a premium in a small Australian market.
This means the fate of Tidewater in 2025 hangs on out performance in West Africa, a market known for its difficult operating conditions. Despite a “a nonrecurring customs duty settlement” in an unknown African country revealed in the footnotes of page 41 of the 10-Q, the 68 vessels in West Africa made more money than all the four other regions combined (US$43 million in operating profit).
The wheels on the Tidewater bus are slowing down. If West Africa hits a rut, it will be ugly for the company. This is not a siren call of doom – Tidewater has low debt, a large fleet of high-specification vessels, and a huge geographical footprint to shield it from problems in any one market. But the third quarter results for 2024 suggest that 2025 might be a caesura for the company.
Never underestimate Tidewater’s management’s ability to pull off a surprise, a big deal or a daring disposal. But the core business faces headwinds in a way that it did not in 2022 and 2023.
The situation is made worse by Tidewater’s continuing denial that newbuilding vessels are profitable or necessary. The company’s fleet is approaching 13 years of age now on average, and there has been a spate of newbuild orders by new entrants.
In ten years' time, Tidewater will cease to exist as a business unless it invests. We have said this over and over, and the response from the management is to shrug their shoulders, cash in their stock options, and ignore the elephant in the room.
We were disappointed to see that even in its new investor presentation, Tidewater was still pumping out the myth that high-specification PSVs cost US$65 million to build.
They don’t. I would expect a build cost of 50 to 60 per cent of the price that Tidewater CEO Quintin Kneen keeps repeating in his investor materials. Capital Offshore, Costamare, Hercules, and now the owners behind the Nantong CIMC order know that the actual build cost is much lower than what Tidewater says.
Last Friday, we reported that Chinese shipyard Nantong CIMC Sinopacific Offshore and Engineering had begun construction of a new 800 square metres clear deck, diesel-electric PSV on speculation. Does anyone think the owners paid US$65 million for this vessel?
No, and why Tidewater keeps repeating this nonsense is a mystery. It just destroys the credibility of the leadership. Going into a tough 2025, Tidewater needs a long-term vision and a new strategy to maintain its position as market leader. Credibility will be key.
The company has surprised and delighted shareholders in the past. Time to do it again.
Background reading
We love to cover Tidewater – part one of this feature is here, our coverage of the CEO’s spat on new buildings with none other than Evangelos Marinakis in New York is here, and you can read our analysis of its first quarter results here, full year results for 2023 (“epic"), and its third quarter results from last year.