Oil service stocks (as measured by the Oil Services HOLDRs (NYSE:OIH) exchange-traded fund) have staged a little rebound from their late October lows, but they are still well below the summer highs and seem attractively priced on the whole. But that's not to say that each and every oil service stock is worth a place in your portfolio. I would argue that investors may want to stay wary of leading offshore services provider Tidewater (NYSE:TDW) for the time being.

Dayrates Up, But Costs Up More
I'm not enamored with the recent financial performance of this service company. Revenue was up 9% in the recently-reported quarter, as a solid improvement in dayrates was offset by a small decline in utilization. Lower revenue from Tidewater's shipyard business also hurt the financial performance, but this is a lumpy business segment, so I'm not inclined to make much of it.

I'm a little concerned about the cost inflation that the company continues to see. In contrast to high single-digit revenue growth, Tidewater saw a roughly 23% jump in its vessel operating costs. For several quarters now, there has been a trend of lower utilization rates and lower margins, and that's not a winning trend.

Some of margin pressure is due to higher drydocking and fuel expenses, but some of it is also due to higher crew costs, and I'm concerned that these costs won't be controllable if (or when) dayrates begin to sag. (For more on this analysis, read The Bottom Line On Margins.)

Lot Of Capital Is On The Hook
Even though Tidewater has an existing share repurchase authorization, it bought no stock in the recent quarter. This is due in no small part to the company's outstanding capital commitments. Tidewater has 57 newbuilds underway, for a total cost of $1.2 billion, with about $800 million left to pay.

Now, the company does have over $100 million in cash on the balance sheet and a relatively low debt-equity ratio, but that $800 million bill seems sizable in comparison to the $2.4 billion enterprise value of the firm and the roughly $500 million in annual operating cash flow. (For more reading on the balance sheet check out Testing Balance Sheet Strength.)

In a normal market, I might not be so concerned about that $800 million, but neither the credit markets nor the equity markets are "normal". What's more, there is an estimate that there are about 700 newbuilds underway around the world, and management estimates about 150 of those speculative (that is, customers are having rigs or support vessels built with the intention of selling/leasing them into a hot market).

Look at the Other Options First
I like the idea of playing the trend of offshore energy development, but I'm not confident that this is the play to pick. There are other service and equipment stocks like Transocean (NYSE:RIG), Cameron (NYSE:CAM) and National Oilwell Varco (NYSE:NOV) worthy of consideration, or even companies like Acergy (Nasdaq:ACGY) - despite my concern about its backlog issues - and straight E&P companies like Petrobras (NYSE:PBR). (To read about the backlog problems at Acergy, read Trouble Below The Surface At Acergy.)

When so many other names have gotten deep-sixed in this sector selloff, I'd shop carefully before committing to any one idea. While I like the disclosure and clarity offered by Tidewater's management, I just want to see better performance on the cost side before moving this one up my list.

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Tickers in this Article: TDW, OIH, RIG, CAM, NOV, ACGY, PBR

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