Anecdotally, the industry seems to have stabilized around here to slightly lower than June as more
vessels are cold-stacked offsetting fewer rigs, leading to consistent or slightly better utilization at lower
day rates (or at least, that’s what I can tell from various industry publications). However, I wouldn’t be
surprised if things continue to slip slightly further south over the next few quarters. Fortunately, the
rally in oil from the $20s to around $50 has seemed to stabilize rig usage somewhat—though at much
lower day rates.
It is worth noting that bankruptcies in an industry like dry bulk or cargo shipping only move the boat
from one set of hands to another. I bet you that with a few hours of phone calls, I could get any boat
contracted with an operator who will get me a crew, cargoes, etc. That’s why bankruptcies in shipping
don’t help supply. OSVs are about safety record, service quality, utilization, etc. related to much more
expensive sets of equipment like a drill rig. Therefore, there is real franchise value and knowhow for
someone like TDW who is the industry’s largest player. A round of industry bankruptcies will only help
TDW as you cannot simply take a boat and crew it and operate it like you can in dry-bulk or cargo. If a
smaller player fails, the boats will get cold-stacked and overall supply will drop as there isn’t much
demand to buy new ones today, when everyone already has too many boats.
If oil can find an equilibrium around here ($50/bbl) to slightly higher, the industry should bottom in the
near-term as rigs will stop coming out of the market, making TDW highly undervalued on a book value
basis at book of $39.35 (assuming it can survive that long). Metrics like cash flow seem less relevant as
there is no cash flow at the bottom in a highly cyclical industry like OSVs. Even assuming a cyclical
recovery to .2x book gets you roughly a 5-bagger from here.
This isn’t like a drill rig that borrowed money based on one day rate and now is insolvent because
those day rates are impossible without $100 oil. All you need is for demand to stabilize at an equilibrium
that allows OSVs to earn some return on capital. For a point of reference, 15 years ago, the OSV industry
was very profitable at a time when oil sported a 20’s handle.
On Friday, October 21st, after the close, TDW put out a PR that sent the shares down by roughly half on
the following Monday. I think the market has completely misinterpreted this PR. For some back-story,
the company is in violation of its covenants related to EBITDA coverage ratios. They have $669m of cash
and $2.041 billion of debt as of June 2016 for net debt of $1.327 billion after drawing down $600m on
the revolver in March before the covenant breach. They have paid their interest on time and have no
near-term maturities. Normally, in a situation like this, the company begs forgiveness, pays a fee along
with a higher interest rate and gets an amendment that allows it to march on with life for long enough
to see if industry conditions get better or worse.
TDW is in a funny situation as there is no senior lender. In this case, there are 8 separate lenders who
are all pari-passu for seniority and none is secured. This means that an amendment requires all lenders
to sign on. On TDW’s side, they want relaxed covenants for an extended period of time and the ability to
keep some cash from the revolver drawdown while returning the rest—basically they want to set things