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Investors eye offshore marine - Tidewater share offering

Photo: Marcus Hand Swire Pacific OSVs at anchor in Singapore
Swire Pacific OSVs at anchor in Singapore
Quintin Kneen, the CEO of listed offshore service vessel provider Tidewater (NYSE: TDW), kicked off his company’s Q2 earnings call on a bullish note.

Kneen told investors: “I'm pleased to say that the second quarter continued a pace of rapid improvement in the offshore vessel market and more importantly, marked an inflection point in the market that we have been anticipating for some time now.” He continued, saying: “We've talked about momentum building in the business. The second quarter marked the tipping point in vessel supply and demand dynamics.”

Last week, TDW issued nearly $63m of stock, 3.5 million shares priced at $17.85/mper share- discounted slightly from the previous closing price. These new shares are tied to an April, 2022 deal where Tidewater had purchased Swire Pacific Offshore Holdings Limited – which is now known as Tidewater Pacific Offshore Holdings Limited, for around $190m total, consisting of $42m cash, plus 8.1m “Jones Act warrants”. The entire proceeds of TDW’s new stock issue will be used to purchase back some of the warrants granted back in April  to  a Swire-linked company called Banyan Overseas Ltd, which had held the offshore unit.  

If shares underwriter Morgan Stanley exercise their option to purchase additional shares, then the capital raise would be increased by another $9m to then be used for buying back additional warrants from Banyan.

This is where it gets complicated. Where a listed company is the buyer of marine assets- a portion of its payment, or indeed the entire payment, can be in the form of company shares. Jones Act warrants are a very special variant on “shares for ships” sometimes used in vessel purchase deals.  In Tidewater’s purchase of Swire OSVs, the majority of consideration consisted of the warrants- really options to buy shares, good for a lengthy period of time.

Tidewaters’ post-purchase fleet now exceeds 200 vessels, following the April, 2022 Swire Offshore acquisition, which brought in 50 OSVs –consisting of 29 anchor handlers and 21 platform supply vessels.

Though it operates all over the globe, TDW must maintain compliance with the “citizenship requirements” tied to the Jones Act (up to 25% non-US citizen ownership of shares is allowed). Maintaining this Jones Act compliance requires navigation along a tricky “slow and steady” course, with TDW carefully managing the “citizenship’ issues. TDW says that it tries to keep non-US share ownership at around 24%.

The proceeds from TDW’s share offering, possible now with the increasingly favorable outlook for offshore service companies, will ultimately flow to the Swire subsidiary, as TDW repurchases 3.2m warrants.

With the bright outlook for offshore activity, TDW might possibly do a similar transaction in the future if the numbers align.  Indeed, TDW stock more than doubled from year end 2021 into June 2022, and its high oil prices, before backing down in July and into August, creating favorable economics for the warrant repurchases. When the water clears, Banyan will still hold roughly 4.58 million Jones Act warrants (each providing for the purchase of 1 TDW share) which can exercised over another 24-1/2 years. 

Offshore service vessels, which TDW operates all over the world, may see the increased cash flows which attract investors;  Kneen told investors on the  Q2 call, “over the next three years, I see this to be a vessel-constrained market which will continue to push up day rates.” He did elaborate a bit on the supply side sweet spot, saying: “There's not enough boats to reactivate. There's not enough people to crew the boats. There's not enough parts to reactivate the boats. The economics still are not there to justify a new build.”

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