Tidewater Drops Anchor on Fleet Replacement

• The Company: Tidewater Inc, the world's largest provider of offshore supplies vessels to the energy industry.
• The Filing: FORM 10-Q filed with the SEC on October 27, 2008.
• The Finding: Tidewater has 57 vessel commitments of various class and type, ranging from offshore tugs to deepwater vessels, scheduled for delivery from November 2008 through 2012. Given uncertainties in the credit and energy markets, the company is in the process of re-assessing its previous strategy of fleet expansion and replacement plans.

At September 30, Tidewater had total available liquidity of about $445 million, which included an unused revolver capacity of $300 million (which matures in May 2010). If customers cut back on shallow water exploration and development activities, future operating cash flows might not be sufficient to fund the existing gap in contractual obligations of $377.1 million. In the context of current conditions, Chairman and Chief Executive Dean E. Taylor conceded to analysts on the second-quarter 2009 earnings call that the company had scaled back its expectations in terms of what can be funded out of existing resources.

To date, the company had expended $169.7 million for the construction of 23 anchor handling and towing-supply vehicles, with $285.2 million in capital commitments outstanding. In the second-quarter 2009, average utilization rates of Tidewater's anchor handling and towing-supply vehicles fell year-on-year 8.6 percent to 48 percent -- no surprise, as the majority of its fleet of 257 vessels of this class was more than 25 years of age. Management anticipates using future operating cash flows company to fund its replacement needs -- but again, what happens if operating cash flow turns negative?

Although many U.S. based energy companies have cut capital spending on domestic exploration projects, Taylor said on the conference call that it was his feeling "activity in the international markets [would] not be impacted as much or as soon as domestic activity."

In addition, of the vessels scheduled for delivery through 2009, only about 52 percent are contracted for some term. Nonetheless, even if day rates turn south, Tidewater intends to take delivery and pay the outstanding monies owed on all 57 vessels, said Taylor.

As of the six-months ended September 30, free cash flow generated by Tidewater was $(58.9) million.

The Question: If operating cash flow remains negative, will the company successfully be able to navigate the credit or equity markets for necessary capital financing?