The offshore energy market is tough enough in normal times, or whatever passes for normal. Making matters even more challenging for Tidewater (NYSE:TDW) have been the uncertain fate of the company's Sonatide JV, the need to refresh the fleet, and the fractured state of the market in which many small players will cut prices to gain business. While the service and supply side of offshore energy will probably always lag drilling, in terms of investor interest, Tidewater could nevertheless be worth further investigation as offshore activity picks up.

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Improving Demand and Profits Close the Year on a Positive Note
Tidewater reported revenue growth of 14% on a year-on-year basis, or 6% on a sequential basis. Overall utilization improved annually by 160bp and sequentially by 80bp, with overall deepwater vessel utilization approaching 85%. Utilization remains weakest in the Americas, though dayrates there have held up reasonably well.

All in all, revenue declined about 4% in the Americas, while climbing 26% in Africa. Utilization and dayrates also continue to vary considerably with fleet age; new vessels are seeing better than double the utilization rate of older vessels, with dayrates nearly twice as strong.

Tidewater is also doing relatively well on margins, at least in reference to analyst expectations. Gross margin improved almost two points from last year, but did weaken a bit sequentially. Operating income followed a similar pattern, rising better than 84% (adjusted) from 2011 and moving up a little on a sequential basis.

SEE: Understanding The Income Statement

Swapping out Old for New
Like Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO) and Seadrill (NYSE:SDRL), fleet age matters a great deal to clients, and its increasingly difficult to get good terms for older vessels. Tidewater is navigating this by trying to sell old vessels or cold-stacking less economical old units, while also taking delivery of new vessels.

There is some balancing involved here; poor dayrates for old vessels don't exactly have bidders lining up, while Tidewater's balance sheet limits just how quickly they can add new vessels.

SEE: Earning Forecasts: A Primer

How Much Is Really at Risk with Sonatide?
One of the larger overhangs for Tidewater has come from the uncertainty regarding its joint venture with Angola's national oil company, Sonangol. Sonatide has not only grown to a sizable piece of Tidewater's revenue, but it has also accelerated the company's efforts to build its business in sub-Saharan Africa. With companies like Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM) and Anadarko (NYSE:APC) investing huge amounts of money in developing offshore blocks in African waters, this should be a real multi-year opportunity.

So far, the two companies have agreed to continue a partnership that was supposed to end this March, but there's no telling if they will find a long-term arrangement. If this JV ends, Tidewater will still have the boats in place and there will still be a demand for those services, but rivals like Oceaneering (NYSE:OII) or Seacor (NYSE:CKH) could become more competitive. In other words, seeing Sonatide end would be a near-term setback, but would not likely change the long-term potential of Tidewater all that much.

SEE: Oil And Gas Industry Primer

The Bottom Line
Wall Street has generally never been as keen on marine support as on the offshore drillers, and I can understand why. Where companies like Transocean and Seadrill can sign long-term contracts at dayrates of over $600,000, Tidewater's best rates only about 5% of that. Moreover, there are relatively few competitors in the deepwater drilling space and it takes considerable financial wherewithal to compete; there are over 400 supply vessel competitors in comparison.

That said, demand is improving and management seems to have taken a rational attitude toward cold-stacking less economical assets. With fair value likely in the range of the high $50s to low $60s, Tidewater is worth a look for investors still looking to play the deepwater drilling and production cycle.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.



Tickers in this Article: TDW, OII, CKH, RIG, SDRL, DO, CVX, XOM, APC

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