We came across a bullish thesis on Tidewater Inc. (TDW) on Raging Bull Investments’ Substack by Jake LaMotta. In this article, we will summarize the bulls’ thesis on TDW. Tidewater Inc.’s share was trading at $61.59 as of Oct 24th. TDW’s trailing and forward P/E were 20.33 and 36.36 respectively according to Yahoo Finance.
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Tidewater (TDW) is an attractive investment opportunity in the offshore services sector, especially considering the overall trends in the offshore drilling industry. As a provider of offshore support vessels (OSVs), Tidewater is significantly impacted by the same factors that affect offshore drillers, including supply and demand imbalances and the structure of dayrate contracts. Offshore rigs and vessels are capital-intensive assets with high fixed costs, meaning that when demand for services increases, profit margins rise significantly due to operational leverage. Conversely, during periods of low demand, the sector can suffer from negative margins due to the cyclical nature of the business. However, the industry is currently undergoing a period of rationalization and consolidation, which is expected to smooth out some of the historical volatility that has plagued offshore drilling.
Tidewater’s business saw tremendous success in 2023, with shares rising significantly from the low $20s in late 2022 to as high as $111 in May 2024. However, since then, the company, along with the rest of the offshore drilling sector, has experienced a sharp sell-off, with Tidewater’s shares falling over 40% from their peak, while drillers have declined by 25-30%. This sell-off appears to be driven by temporary factors rather than a breakdown in the underlying thesis. One of the primary concerns was a slowdown in dayrate momentum, as several drilling campaigns were delayed. However, these delays were short-term in nature, with management across the industry reaffirming that the slowdown was due to timing issues rather than structural problems with demand. In fact, leading-edge dayrates for offshore floaters are now exceeding $500K per day, and utilization remains in the high 80s to low 90s percent, indicating that the demand environment remains robust.
Additionally, supply constraints are a critical factor underpinning the investment thesis for Tidewater (TDW). The industry is currently experiencing a shortage of new rig construction, with few new builds expected in the coming years. This is primarily due to the high costs associated with replacing rigs, making new construction economically unfeasible unless dayrates reach exceptionally high levels. Consequently, about 90% of the fleet is already contracted, leaving little room to accommodate any increase in demand. Reactivating cold-stacked units is not a viable solution either, as it is both costly and time-consuming. Therefore, the market is heavily dependent on a limited fleet of active rigs. The current consolidation trend in the industry, with major players like Transocean, Valaris, Noble, and Seadrill controlling over 75% of the floater market, is likely to further rationalize supply and support higher dayrates going forward.
The recent pullback in Tidewater’s stock price appears to be more a function of momentum and technical factors rather than a deterioration in fundamentals. The company’s operational leverage, combined with strong supply-demand dynamics in the offshore space, suggests a favorable environment for a recovery in share prices.
The bullish thesis is based on Tidewater’s ability to capitalize on robust offshore drilling activity. Higher rig dayrates and utilization signal increased demand for Tidewater’s OSVs, allowing the company to boost vessel utilization, raise dayrates, and leverage operational efficiencies to enhance profit margins. Structural supply constraints in both rigs and OSVs, alongside industry consolidation, create a favorable environment for sustained profitability, positioning Tidewater as a strong investment during rising offshore exploration and production cycles.
Tidewater Inc. is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 35 hedge fund portfolios held TWD at the end of the second quarter which was 36 in the previous quarter. While we acknowledge the risk and potential of TDW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TDW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.