Yet Another Value Podcast - Judd Arnold from Lake Cornelia Research Management on Offshore and Tidewater $TDW

Episode Date: January 9, 2023

Judd Arnold discusses how the offshore place is at an inflection point and why he thinks Tidewater (TDW) is the best way to lay it.   Judd's initial piece on TDW: https://drive.google.com/file/d/1cKYzHg62bamDQa620NZcmn_af0A0xTfT/view  Judd's TDW space: https://twitter.com/CorneliaLake/status/1600172923355922434?s=20&t=_Q2xMKdTTh1Lhlp-HeRD3w   Chapters  0:00 Intro  2:30 What's interesting about offshore right now?  5:50 Comparing today's cycle to 2012-2014  10:00 TDW's replacement cost and why new build isn't starting any time soon  18:30 Why increasing utilization can quickly spike day rates  21:00 Discussing capital returns if we do see a day rate spike  25:20 Why focus on TDW versus the other offshore players?  30:30 What breaks the offshore cycle?  36:10 Offshore as a snowball running down the hill  39:30 How regulatory uncertainty impacts terminal value and potential new build dynamics  42:40 Discussing TDW's acquisition strategy  46:40 Given the cyclicality here, how do you value offshore?  54:40 Haven't the stocks already run?  59:30 What could accelerate the cycle?

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watching or listening to it. With me today, I'm happy to have Judd Arnold. Judd, I don't know what I don't know what title to call you. I guess private investor, Judd has done just phenomenal work on the stock we're going to talk about. But, Judd, you can call yourself whatever you're like. But hey, how's it going? Thanks for coming on. Thanks for having me. This is great.

Well, let me start this podcast off with a quick disclaimer. First, I just want to remind everyone that nothing on this podcast is investing advice. You know, we're going to be talking about, I think, the offshore space in general with a particular focus on Tidewater today. Every company that we've talked about has gone bankrupt at least once, maybe twice in the past five years. So if that's not a screamer saying, hey, please do your own work, you know, not financial advice, consults financial advisor, I don't know what it is. But anyway, you posted a fantastic memo. I was very jealous of it because I've been following the space for a while,

but you posted a fantastic memo, mainly focused on Tidewater, but covering the offshore space in general last month. I'll include a link to it. You did this great spaces on Twitter on the offshore space. I'll include a link to that in the show notes as well for anyone who wants to check that out. But you did it. I reached out and said, hey, I've been doing work. I wanted to have you on. So yeah, just wanted to have you on talk about tidewater in the offshore space in general. So I'll kind of pause my rambling there and just tell us to you, you know, just high level. What's so interesting about tidewater in the offshore space in general to you right now? It's the inverse of 2012, 2013, 2014, 2015. That's what's

interesting about it. And, you know, that was, that short trade was one of the best trades I've ever had while working for somebody else. I worked at three mega hedge funds in my career. And, you know, that was just an awesome trade setup. So energy is my original sector. I started banking at Lehman Brothers at power and utilities way back in the day. Then I went to my first hedge fund where I was the energy guy. I was the energy guy at the second one, too, with some other stuff too. So it is, I thought energy as a sector was dead for seven, eight years. And I just coming back to it over the last year, the setup here is just so fascinating. And ultimately, I mean, the simple word is just convex. Energy investing is all about convexity. It's unlike growth because you can get

all the analysis right. And if you get the commodity wrong, you're just going to get slaughtered. So you need to create really interesting risk rewards. And I think with offshore specifically, I get this question all the time, like why offshore, you know, OSVs, which are offshore vehicles, which is a fancy word for a boat. It's, you know, a 30 to, well, now they say new bills, it's like a $60, $70 million operation for an OSV. Drilling rigs, deepwater rigs are now, you know, a billion dollar assets. You think about that asset quality versus a frack spread, which. you know, is effectively a diesel truck, although now they got electric, whatever,

you know, a $10, $15 million asset that's going to get run to the ground in five years, big replacement cycle, and anybody can run a frack spread. It just doesn't matter. Offshore, it's like these are big assets. Like, they take three to five years to build. You have to have the right people running them.

Now, granted, it's a capital intensive industry, which is why the big boy, the big EMP companies don't do this and effectively, outsource it to, you know, on the rig side to the big rig operators, be it Valeris, which is, you know, I'll always call Ensco, you know, TransOcean, Noble, Diamond offshore sea drill. And then on the OSV side, you've got a bunch of people. Most of the companies are actually private. You've got a bunch of Norwegian entities, but, you know, that's another super interesting one as well. And they sort of work very well in tandem. For every rig, roughly, you need four OSVs. Perfect. So there's a couple things I wanted to dive in there. First, you dated yourself because you said you worked at Lehman and you worked at a hedge fund as the energy guy. So now people know, A, you worked at Lehman there and B, you worked at a hedge fund when all of them still had energy, when they still had energy people. Because not many hedge funds have those anymore, though, we might get that. But let's just talk. So 12 to 14, right? You said this is the inverse of 2012 to 2014. And for people listening, I just did a companion podcast. I'm going to release onside this with Tidewater. management that you can go listen to that talks about like you know you say 12 to 14 this is the inverse what was 12 to 14 like and why is this the inverse 12 to 14 you just I mean it didn't blow up until 14 when OPEC you know effectively stopped defending price and you think about

offshore versus onshore offshore offshore offshore is long cycle you're if you and me own an EMP company we're drilling off Guyana or wherever we're making a five six. seven-year bet on prices. And at that board meeting, the board deck is this is a $5 to $10 billion commitment. And once this thing's built, like, it's going to flow. Huge fixed costs, very, very low variable and so forth. You think about shale, it's the inverse of that,

which is, you know, the wells used to be $10 million a pop. Now they're seven to eight, although they're probably going back to $10. with onshore cost inflation. But you get back all your capital within, I don't know, two months, and then you've got this really big tail and, you know, huge decline rate, what have you. And what you saw in 14 once, you know, OPEC stopped defending and shale became ascending, is every board made the rational decision of, heck, I don't know where pricing is going, but there is no way I'm making a multi-year bet, just not.

And this was one offshore had sort of crescendoed. So you right before the OPEC bus and shale, I mean, you had a new build order book that was 30% of the existing fleet. And so it wasn't just that existing assets got BKed. Like, you were just dead. Like, it was over. Like, it was going to take, you know, what I thought was more than a decade to sort itself out.

And what turns out was, you know, a lot of these guys came out of bankruptcy. in 17, 18, 19. And it was still crap. You looked at the supply of demand. You're like, this math makes no sense. And COVID really was the accelerant that just destroyed the last vestiges of hope. And you really rationalized all these fleets. And then right as COVID, you know, sort of rolled through, you're like, wow,

she was kind of peeking out. OPEC's now defending price. OPEC's kind of back. And if you, you know, I graduated college in 04. So about half my career was pre-shale, you know, it was 100 bucks a barrel. It was just normal. Natural gas is seven. The TXU LBO, which I guess I'm really dating myself, we sat there and we're like, okay, Buffett's buying 675 Nat gas.

It's actually not a bad trade. Everything you're saying, the TXU one's so funny because Buffett, I mean, he took a bath. Everyone took a bath on it. That was the most complex one. And last year, people were going crazy about. I'm only talking domestic. Obviously, $100 NAC gas in Europe is different. But people were going crazy because NAC gas was touching $8 or $9 for a month or two here, domestic.

And it's like, hey, you know, 10 years ago, that was like, that was kind of the baseline pricing here. And obviously, Shills changed that, NACS. But yeah, so I guess the way to think about it is 12 to 14, you have this huge boom. Tons of boats get ordered. I mean, as you said, about 30% of the global supply. And I know all the, I even was. teasing Tidewater about it, you can go back to Tidewater deck in 2013, and they were saying, oh, don't worry about all these new builds. It's only 15 or 20% of the global vehicles.

And we're going to have retirement. So we'll only account for the time. Fast forward 10 years. And like, what you're having now is the kind of the evolution of what you had there where, hey, for 10 years, not a single boat has been built. So you've got all these retirements and all these boats have come online. You've got every, I do want to talk about the supply dynamic. but you know you haven't had boats you have no new build boats as you said it would take two and half years you're starting to see drilling happening again so demand is going up and that supply response can't really come up online because all the excess supply from years ago is getting taken out and there's no new builds coming on i mean think about this for a second tidewater's

right you call it 1617 evi all right they've got just under 200 boats if they you know new build is somewhere between 60 70 million bucks let's let's just say it's 60 And let's forget about how long it's going to take. Okay. So 30 boats is the enterprise value of the company, new build. And they've got, you know, 200 that are roughly 10 years old. I get that. But in terms of a, you know, my old world, you know, back in 1213, you were always worried about these guys building and building and building.

And it was just a constant thing with this fleet refresh garbage that the street supposedly wanted. And I don't think they ever did. And now you talk to these guys, not only are they out of order, they can't order. Like, it's not credible for you to, all the yards went bankrupt, all the South Korean guys did, most of Chinese yards went bankrupt. That's the other thing. Once that assembly line stops, nobody really knows what it, what it costs to build a rig or an OSV because we're not building them. And if you don't build them, think about, like, you know, the F-35 program. If you build, like, what is a prototype F-35 cost versus, you know, a batch of 200?

If you don't build them, a lot of them at one time, you have no economy of scale. So you layer that plus just like the dollar amount versus the EBs of these companies. So for Tidewater, like I said, like, is it really credible that they're going to show up to a yard and be like, yeah, we want 30 OSVs? And the yard's going to be like, okay, we went bankrupt because of you people. I'm going to want a 60% deposit. Well, they're not going to get a 60%. I mean, they're not he had 40, so even if they wanted to. I mean, with the deepwater rig guys, it's even crazier.

Valeris is, depending on how you want to value ARL, call it a $4.5 billion a UV. I think they've got 38 or 39 deep water rigs and a bunch of jackups, whatever. Like, literally the market value, the entire enterprise value of the company would be dwarfed by a five rig order, which wouldn't move the needle. And obviously, they can't order five. you're not it's not credible so think about like the daisy chain that's going to happen so BP or whoever is going to go to a rig guy okay I want the newest whatever and they're going to go to the yard whoever it is and the yard is going to tell them to go pound sand unless you get a parent guarantee so then the rig guy or the OSV guy is going to go back to like the BP or whoever

and say they're telling me I need a guarantee and you're going to have to give it so let me just back up a second. So I think for people who haven't followed this industry, one thing that might be helpful is, again, in 2012 to 2014, and we've seen this cycle play out before, right? All the OSV guys, all the offshore guys don't know it, but they're all about to go bankrupt because you're about to have this lot of oversupply. You've got all these. 100%. It's like 90% fixed costs on the income statement. Yep. So day rates go up. You get it all. Day rates go down. You get slaughter. And what happened was these guys lost on two metrics, right? Utilization went from, you can't really run an OSV more than 90% of the time.

Yep. Because there's dry docs and the cruise changes and all the other stuff. Same thing for a deep water rig. But utilization, I think brown numbers for the industry went from like, you know, low 80s to 50. Yep. And day rates went from, you know, for the really good stuff, went from like 28,000 to 12. no actually 10 i'm sorry and so you just got slaughtered on everything and then you dumped a bunch of new boats into it and none of these caps you know they financed all the new bill obviously with a ton of

dead all these guys had a ton of dead and it just was like game set match goodbye but i just on the new but i just want to drill it down what's different now versus eight years ago yeah so now you can't build and like i touch all these points and they're huge because what am I really saying, like in every offshore investors mind is this management team is going to screw me. Yep. Yep. And so what you have now in terms of belts and suspenders and probably, I don't know what

there's a third thing beyond belts and suspenders, but you haven't right now. The yards don't want to build. So the time to build, plus they just don't want to, the cost, plus the deposits, it used to be 10% down and the yard would finance you. Now it's like 40, 50, you know, it's going to be five years, forget about it. You, like the yard just don't want this stuff. They're building other stuff, you know, LNG carriers, regular shipping vessels. Like, they don't want this stuff.

So even if you have a management team go rogue or more likely you have the EMP producer, go to the rig company or the OSB company and say, I want the new one. You're going to get it for me. else like you just can't like there's so many points on that chain where it just won't happen and so it's not that we're not going to have new build this cycle of course we're going to have it you at least have a two to three year period where the amount of new bill that you're going to have ordered is negligible yep and then once they order you're going to have another two to five years before you even hits hits the water so you've got this period right

right now where rates have already inflected. Okay. So for Tidewater, their average day rate, I think it's up to 13.5 now. They peaked at 18,000. Now, the fleet composition is way better now. Yep. Yep. But, you know,

they're going to be 15. Leading edge is probably, you know, 16, 17 right now across all their vessels. With their best ones, they're already, I mean, they just got a contract to $40,000 a day. Like, and like, if we talk about this in deepwater, rigs i like doing that because the assets are more uniform and like as deep water rigs go and that way it's

and it's a good time because rig just priced a bunch of contracts last night so we've got like literally 24 hours up-to-date pricing so deep water it's super easy op-x is 200 a day round number okay we bottomed at day rates at 200 a day so operators were like i make nothing but i keep the crew which is really important that's what people never didn't understand on the way down which is these guys aren't going to stack all the vessels and basically take them off the water because they do that. They lose all the expertise of the crew. Yep. So you have to keep operating and it's crazy. And the same thing happens in trucking by the end. There's a few other industries like this where you just you have to operate for zero profit. So you're a zero profit. We're now back to

400 a day, which is huge. And you know, call it low 400s. We peaked the last cycle called 6-6 and change new build economics depending on how you want to you know to be what discount rate somewhere 475 500 and think about drilling is roughly a third of the cost of a well offshore it's really hard to get the unit economics it's like you know that's like the holy grail of you know the offshore excel nerd trying to like to do the unit economics like the easier thing is just to understand the day rate trend because it's like this massive game theory thing and if you know one you know the other and these things are massively in the money so we're already seeing like a year ago you had to make all the speculative calls where you're like oh this looks really good like this is you know and then

in the back of my mind too again versus shale this is long cycle this is offshore is a snowball going down the hill once it gets moving it's like it's like turning an aircraft carrier where you where shale is like turning a fighter jet. Like they can turn it on and they can turn it off. Offshore, once you commit, you're committed. And we're seeing that pick up. And so 400 a day, it's going to be 450 a day. It's going to be 500 because we're through rigs.

And the way you see that, both with rigs and OSVs, is utilization of these fleets. Once you get to 80, like day rates just start reflecting. It gets really tense, right? from 60 to 65 percent utilization, who cares? There's still tons of boats. But once you start getting at 75, 80 percent, all of a sudden the operators start looking around and say, oh, we can't bid them at OPEX costs anymore because things are tight. And as it goes 80, like, again, as you said, a rig, which a rig is much more expensive than OSV for people, Tidewater's OSV, rig, VAL, those are all the rigs. They're much more expensive, but there's still a third of the

well cost. So if you go from $400,000 a day to $420,000 a day, it's not that much. in the grand scheme of a offshore well that's going to produce thousands and thousands of barrels of oil a day at $70 per barrel. It's not that much. So you can go from $400 to $500,000 real quick. Do you want to throw anything on? Yeah. And I think the other piece of this, too, is what we're drilling, what we're drilling right now is this is the best stuff. They field offshore, no, it's Brownfield. Yeah, sorry, sorry, Brownfield. Yep. Like, we shut off offshore. They, for the next three years they know where all the oil is it's on the it's been on the show so shale we're like we're doing parent child we're like okay we're going back to the eunica all right you know we're

really going bottom of the barrel it's like it's crazy stuff it's if like if you're like a foodie in manhattan they just shut off like the west village for 10 years and then they just turned it back on like everyone knows what restaurants they want to go to and then they're really good the really good so i like i i take all that and i'm like okay what's your day and they've all do like tie bar's got no dead i mean like and you've got a restrictive bond vows got a restrictive bond so tidewater management if they want to screw you they really can it's a lockbox until the end of 2020 well now we're in 2023 i used to say all right November 2020 they're going to refy this bond so they really can't do anything crazy

Again, like, so, and then I think they're going to pay out cash flow anyway because, like, you're a management team we've lasted this long. I think everybody's going to be a little bit like Valeris where they're going to be a little bit conservative because they're like, I almost lost my job in my career. And if you're like a 50, 60 year old offshore oil executive, like you know, this is it, man. Some of the many famous last words in investing is trusting, trusting oil and gas management teams. But I'd encourage anyone, go listen to the Tidewater podcast I just did. Bob Robody's on the board. And I think Tidewater's clear. I think Bob is a, you know, he knows his stuff.

I think he's going to communicate to the board or at least be one voice. We're not going on a crazy spending spree here, right? We're going to have this huge inflow of cash and we're going to do accreative stuff. Maybe it's doing things like the SPO deal, which I think was. a very nice deal, but it's probably going to involve a lot of capital return at some point. I think it's all going to be capital return. And I mean, I think the big thing to remember too is, you know, Thai water 10-year average fleet, these boats can stay on the water for another 30 years. The dry dock gets a little bit more expensive and you lose a little efficiency. But,

you know, most of my math, so like the fair multiple, because like if you do a single shift DCF and I have it in the, in the memo I put out, like with a 15% cost of capital, basically you back into with paying a seven times multiple year one on that asset and by year 10 it's like worth a five times multiple on whatever your day rate assumption is but if you give me another 10 years which is what we're saying okay then it's a seven times multiple's fair and maybe we'll discount that a little bit for a 10 year average fleet because you know those last 10 years we're going to you know the dry docking is going to be like okay like this piece of the whole corroded we need to like put up steel wall board to like keep the water out you're going to lose some hydrodynamic efficiency on it but

whatever like you know this thing just the joke like tidewater could do a billion of free cash flow at new build economics let me go ahead go ahead did you want to say yeah on a 1.5 billion ev and we could we could reach new build economics likely go through it within the next 18 to 24 months I mean that's kind of the whole story right now. Like, I can talk, we can go into every piece of it, but at a very high level. All you need to remember is new build economics are likely to be hit within, you know, 18 to 24 months, maybe for me, 36. And that's a billion of free care. That's what I was going to say. Like, when I look at Tidewater, and I've got a position in Tidewater, I'll disclose, you put the memo out. I'm sure you've got a position Tidewater so we can

disclose that. But when I look at Tidewater or a lot of the offshore space in general, right, I kind of look at it as, and there is one big caveat, oil prices can't go to 40, but as long as oil prices don't crap out, you know, you've got this great cycle where it's not that we're betting, as you said, 12 months ago, you were saying things are starting to look better. And obviously the stock prices have moved a little bit since then, but like Tidewater, I'm paying eight or eight and a half times last quarter's annualized EBITDA. That is going to go up real fast because we're already seeing the leading edge rates at really attractive rates. But what I love about the thesis is, there's. no debt. So it's not like I'm taking on huge leverage risk on like, say, like a transition or something. There's no debt. So I'm kind of just buying this unlevered. I can wait a little bit if things got rocky for six months or something. But, you know, we're about to see this gusher of a free cash flow if rates can hold 30,000. But the two great things to me are, A, new belt economics are still above the 30,000 rate, right? So you'd need rates to go even higher to even start to incentivize new build. And then as we've talked about, like, it would take two

and a half years minimum if you started today new building and i don't even think that's realistic because a we're not incentivized and b shipyards aren't set up so you almost have this great thing where you're paying a value-ish multiple on last quarter's earnings those are going to go way up we're already seeing the rates you're going to have this huge cash flow gusher and we're having all that without even hitting kind of like super normal profits that would start to incentivize the new build it's just like all these great things like all the and you can't really new build right now if you wanted to. And that's that's the huge thing. And so we're going to sustain economics way longer. And so we can debate whether it's going to go like I think what's really going to happen is

this mix of you're going to get some premium rate, but really you're just going to take a lot more term. And which it just doesn't matter. The thing's so so darn cheap. Let's talk about so obviously you know the offshore space in general well, right? And I think the two areas people can play is you could do the O.S. And that's pretty much only Tidewater. There are some smaller international ones, but Tidewater is pretty much the only play. Or you could go do an offshore driller. And your offshore drillers, the ones everybody looks at is it's really Valeris, Noble,

or if you want a lot of juice on the offside, because it is really, really levered, because it's the one that didn't go bankrupt, Trans Ocean. And you publish the memo, focus on Tidewater. So I do want to ask, like, obviously a lot of the dynamics we're talking about apply to all the sector, a little bit different. But why focus on Tidewater versus a Valeris, a Noble, a trans ocean, which would give you that massive upside over there? Yeah, I touch on this a little bit in the memo. Like, Tidewater, it's 50 million shares.

It's not super liquid. So you're going to buy what you can buy. And every investor is a different paying threshold in terms of how much liquidity they want. You can't really trade around it. And I tell all my clients, I said, pick your number. like it's the best one because why is it the best one it's the most open the rates are going to reset the quickest and i think there's this debate and it really comes in the most with valeris which is the best assets i would say but it has the worst contracting position by far so it's like the

year the next year multiple on valeris is like 12 13 times ebit's out but on an open basis it's by far the cheapest it's on a price to nap it's super cheap you're just not going to get to eat that that cash well um until probably 2025 and then you've got rig, which is the most open. You know, you're going to reprice most of the fleet in 2023, but you got a lot of leverage. The thing's super lever. I'm a, you know, distressed debt dude. So at least my first two hedge ones were.

So for me, it's like, okay, this thing is blatantly obvious and it's never fine for bankruptcy. And we're fine. But I get that people don't want that. So. And if I, I'm with you, but you look at those numbers and the debt. And Rigg's really interesting for people who don't know. They basically the top of last cycle, they signed 10 year contracts with. It was Shell, right? I think it was shell. 10 years contracts top of last cycle. Because of that, they were so levered. But those 10 year contracts let them, you know, go through all of this and kind of come out the other side without filing. Everyone else had to file. And Rigg is interesting. So because of that, they're super levered. But it's also interesting as a story of, hey, you know, know, in two years, if this cycle plays out, you can see a lot of people kind of pulling the trans ocean, signing some really long contracts at really nice multiples and just returning all that cash to shareholders or something. I think they're just all going to return. I mean, so I think this sector just works in general. I mean, part of why I put a note out on Tidewater was just

the other ones are covered. Tidewater really isn't. I think Tidewater like could benefit from being highlighted. So, you know, part of what I do now in my career, which is sort of more if I sort of left hedge funds right before COVID and then got roped into a few things. And what I do now through Lake Cornelia is I'm a consultant to a few hedge funds and family offices, mostly mid-sized guys. And basically the pitch is you could hire a guy full time, you know, for, you know, I don't want to sound like a hedge fund, sure, but, you know, that guy costs, if you're a $50, $60 million family office up to a $500 million hedge fund or even a billion dollar hedge fund, you know, a quality guy costs a couple of undo. And that's real money. And most people who run these funds are used to, you know, working with people at a different level. And so I said, look, I'm going to give you my ideas. I'm going to be basically an outsourced senior analyst to you. You get what I'm looking at, which is there's a lot of energy. I also do a lot of event-driven stuff and whatnot. And, you know, all the money's on your books, you know, especially the family offices.

They want to keep, nobody wants to outsource anymore. Everybody wants to do it themselves. And that's sort of this business that sort of has evolved for me as I manage my own money as well since 2020. And sort of the thought was I had one of my, one of my bigger clients wanted me to, you know, be more public on Twitter. And then that sort of evolved into putting stuff out and sort of with Tidewater. and she said, look, I didn't put anything out in a while. I just said, look, that people seem interested. I could highlight something that isn't covered and not in a pumpy way,

because I don't know how you really pump it, but let me lay out all the work. People are already looking at the space. I think this is really interesting. Granted, it's a billion five market cap. And I think people should look at it and just start a conversation and whatnot. And I was really stunned with how many people listen to the spaces. I think the company was really stunned.

I think everybody was really stunned. Like over 6,000 people listened. And I think going forward, I'm going to do a lot more of it, you know, in situations like that. Like, it doesn't make, I have nothing to add on Apple. Like, you know, but that's the thesis behind this podcast too, right? I mean, I guess sometimes we'll do larger companies. But I will just say, like, people should go look. I said at the beginning, the spaces was awesome.

The note was awesome. It was obviously right in the wheelhouse. But yeah, yeah, that's the dream. Let me ask a few other question of this. Look, I'm bullish on, I'm bullish on this. You're bullish on this. Again, people can listen to the companion podcast on this. Tidewater management's pretty bullish.

A lot of people are going to hear this. And, you know, what I tweeted out, hey, do you have questions for Judd? A lot of people said, why would anyone invest in this space? I think a lot of people were scarred by the past five, seven years in this space. But, you know, the famous thing in commodities, people were calling super cycle for oil in 2014, and that obviously didn't come in. What breaks the cycle for offshore at this point? Is it only oil prices going to 40, or is there anything else that can kind of stop the rise

and send us back to... I don't think oil going to 40 stops. I think it pauses it. And my note that I put out, I started with the macro, and look, I started as a commodity investor, so you always start with supply demand. Yep. Depending on where you want the cycle, the supply demands either in the front or it's in the back. And I have this operating thesis on oil that we die at 105.

And what that means is at 105 million barrels a day, I just don't see how the math works. Now, it always gets solved. Don't get me wrong. But effectively from 2010 to roughly 2019, we went from 85 million barrels a day to 100 million barrels a day. And most of that was China. was two-thirds of that demand increase, and the Middle East and a few other emerging areas were the rest of it.

So non-developed world. And from a supply perspective, shale was, I think, 11 and a half or 12 million barrels a day of that 15. And you think about prospectively what we do. And, you know,

shale's peaking in the U.S. And so we're back in my mind to this world where offshore, which is 25 million barrels a day, five of which is true deep water. The rest is continental shelf, you know, 20 million barrels a day. You're looking at OPEC spending, I don't know, 30, 40 billion dollars to increase production from 12 to 13 million barrels a day. Really, I mean, they're going to have 50% of the jackups fleets in the world is going

to be in the Persian Gulf. You know, OPEC just going nuts. What does that tell you? Like, we're in real trouble. So I don't know if the next 10. years we grow per demand by 15 million barrels a day. I don't really need to. Like, it's going to grow. Like China GDP per, you know, what is that oil, oil use per capita numbers? I mean, the numbers are massive in India as well, which is incredibly ascendant. I mean, I'm dating myself a little bit,

but the operating numbers used to be, you know, five, 10 years ago that if China goes to Mexico oil use per capita, that increases 18 million barrels a day, which is U.S. demand. And if India goes to China at that point in time, not that India isn't going to increase. And those round numbers, India, China basically same number of people. That increases 6.5 million barrels a day. And it's just these numbers are stressed are huge. Now, you don't have to buy into all of this crazy peak oil, all this other stuff, to know that like on the margin, offshore spending.

is going up because that's where the oil is and we need it. And I think it's as simple as that. We've seen fleets of rigs and OSVs go down over 12 years. We're starting to see investment pick up. We're still 50% of peak 2014 levels. We're back to 2020. This year we might be at 2010 levels of offshore spending. That was right before they really ramped. The biggest oil guys in the world, the Middle East, you know, OPEC is spending a fortune in the shallow water Persian Gulf. Like, this is happening. And so, yeah, oil can go to, I mean, oil can go negative. Now we have that joke. But like, I just, on a two, three-year basis, like, I just think if oil washes out, like, you're just going to buy all this stuff because shale's gone. And

And, you know, you know, look, I obviously have a position in Tidewater. I don't 100% disagree with you, but I just keep thinking, I remember back to 2016, where I'd hear, 2015, 2016, where I hear people say, hey, we've got the global, the global supply curve for oil mapped out, right? And oil can never go below 65 again, because that's, that's where the marginal barrel comes at. And, you know, 18 months later, oil's lingering at 40 or something. And it's just gone through it. And I just worry, like, again, Tidewater, it doesn't necessarily, there is a point. I think it's what I've heard from management teams. It's like the high 50s.

If the forward curve kind of drops below the high 50s, that's where they think you could see a real decrease in the kind of the cycle we're talking about here. Though the supply story is not changing. So who knows because a lot of this is still profitable. But that's just one of the couple things I worry about here. Like when everybody seems so bullish, it seems like I remember I was talking to Nat gas guys in the middle of last year. So middle of 2022.

And that gas spot was like nine. And they were saying, I keep looking at the demand curve. And I don't know how prices don't go up from here, right? There's no supply and I don't know how we don't go up. Free port goes offline 12 hours later. And Nat gas is, you know, today we're talking four. I realize it's all different, but I'm just throwing, throwing thoughts. Yeah.

So like, because you're touching on a big discussion I have with a lot of people who go deep on this, which is asset quality, asset intensity, and duration effectively. So let's break those pieces down. So that's why I describe offshore as like a snowball running down the hill. It's so long cycle. And that's why it's driven by investment. These guys can't just stop. So on the margin, if we're increasing and you have some type of a constructive view,

on the commodity and you think Shale has really, you know, fired its best bullet, which at this point, you're not making a judgment call. They're telling you. I mean, you can see it in the production numbers. These guys had every reason to increase. And unless we find a new basin suddenly, which it just doesn't sound like there is one, you know, offshore becomes incredibly attractive. It's also the break-evens because you think about the inventory. The inventory of offshore is until we get rid of all the brownfield stuff that's just latching onto existing infrastructure like it's really good economics

as part of a portfolio because it was just so minimized we're coming off such a low base and again like reverse a frack truck or you know I remember when sand was really big this guy worked with had the best like Wisconsin white dramatic thing he was the guys like

incredibly successful co-runs a massive fun but I always got a kick out of him being like Wisconsin White House the Wisconsin White and we do all these meetings with these guys and this is back in oh god 12 13 guys would come in march in they'd be like we can do all of it at one time's cash flow we can build and I'm like don't tell me that buddy if you can do it if you can like do a new sand mine in like four months and it's one time's cash flow we're going to have too many sandmines yep same thing with frack trucks and all the other stuff. You take offshore, like, this is why I'm so myopically focused on the new build,

which is, he's a really expensive assets. Like, at OSV now is, I don't know, 60 million bucks, and now we're going to play this tape back. And I keep saying 60, 78, because I don't really, I don't know in all the boats have different specs and whatnot. Tidewater slide. I'm looking at the Pareto deck, slide 21. They think it's 65, but as you said, who knows, who knows what steel price is going be when you start building. And like for offshore rigs, they say it's a billion. Like it's probably a billion two, might be a billion. Like, we just don't.

Like, the point is time to build is way longer. It's at least two years. It's probably five. Well, the deep water rig is probably five. But like, you know, it's probably two, two and a half, whatever. That's a long time to maintain. And like, it's just not going to get taken away. We're with gas.

Dude, they just, they drill another. Like, we have. much gas. Like the world is a washing gas. So I think the sustainability of the tightness is just way, it's not comparable to other things. And that's what creates the convexity of the trade. Let me go through a few other things on the new build side. I'm sorry to keep focus on new build. It's one of the things I love about this. Like, hey, yes, these guys are going to mint money at 30,000 day rates, but this is OSVs, but they're going to mint money at 30,000, but new build economics requires probably 40,000 or more plus sponsor guarantees everything.

Let me just go through a couple more things. First, I think this is more applicable on the rigs side than on the OSV side. But for rigs, as you said, these are 20 or 25 year assets. A lot of people look at rigs and yes, we're going to have in the near to medium term, there's going to be a lot of drilling. I think there's going to be a lot of drilling in the long term. But if you're buying a 20 year asset, like could you really look out to 2038, which is 15 years from now and say, for sure we're going to be offshore drilling. Like, if not, like, you've really got to question kind of the out years of that, which pushes pricing up, pushes kind of the cost of capital, all those assumptions up.

So I think that's one other element of the new build story. Like, you kind of need to factor an even higher day rates in the short term should account for that questionable 15 plus year terminal value, if that makes sense. Yeah, you're touching another piece, though, as well, which is like interesting at the stock selection, which is the cat, there's a big counterpoint, which is that the oil companies got so burned with long-term contracts that they're going to stay short and they'd rather take the risk on overpaying for a three-year contract and locking in for 10. And like, I think five might be the maximum duration that they're willing to do, and does that

cap the multiples of the stocks? Now, the only offset to that is just to buy back a ton of just to buy a ton of shares. And do you really care? And certainly at this, where these stocks are valued right now, I just don't think you care. Because, you know,

I have this table I put in the report. I was like, all right, let's just do a five times multiple on 450 a day for the deep water guys. And for Valeris, that's still up 120% from here. And,

but like, are you going to break through five times EBITs off for this business? You know, I don't know. And it may just be one where like you perpetually trade with a higher, you know, free cash flow yield or whatnot because people see that this is like this special moment. And I think that's something to consider, you know, I'm sort of the next chess move. I'm at very at peace with that right now because like I said, I slap a five times multiple on $450 a day.

And I'm like, I'm still penciling on a hundred percent return. And even if I don't get to eat that with Valeris for the next two and a half years because of where they've contracted out, like, this market's horrific. Like, and I'm saying the stock market, not the, not the Oshawa market. Like, you can like comfortably pencil out, pencil out with conservative returns, like a double in two and a half years. That's, you know, you know, a 20% higher R is a double in three and a half years. So like, it's pretty. It reminds me, this is such a, but the terminal value questions and the multiple question, it reminds me a little bit.

We're obviously talking about this aren't just of tobacco where they just always trade for this high free cash for multiple. and everybody's worried next year it's going to go away, all this type of stuff. And they just print a bunch of free cash flow and they return it all to shareholders. And you know, you do great over a 20 year period. Obviously, 20 years, we'd have a whole new fleet for Tidewater if we're talking 20 years out. But I do think there's something to that. You know, that's not a bad thing either because you look, Tidewater, the other thing that I really liked about it, going back through the history of what's happened and what I like about this manager team. They've done everything that you would have wanted them to do.

The GLF merger, and these guys came from GLF, was unbelievable. They've taken corporate GNA per boat from 800,000 to 400,000. Yep. Like they bought, you know, the GLF merger, then SPO and unbelievables, you know, what I would say is a steal, but look at SPO, and this is the upside of what, of the tobacco, ESG, whatever you want to call it. SPO, you know, energy conglomerate, they just said, we don't want to be in boats anymore. and we'll take a stupid price.

Because it, it took a, it was a, I mean, Tidewater, obviously got a great deal. And it looks even better in hindsight because they, they did it right before, they had a thesis, the market starting to turn, we're starting to see it in rates. And they did it. And they had to do it with some warrants for a lot of different reasons. But they did it. SPO is probably happy. Those warrants, they, Tidewater sock went off.

I mean, those warrants are really just shares, right? because they're penny warrants. Those are junk. Yeah, I'd say weren't just yet. Yeah, but I think the SPO point, I bet you if you talk to the SPO division guys, they probably went kicking and screaming. They're like, boss, like, I know OSVs are a small part of SPO,

but like, why are we getting rid of these things? The cycle is just about to turn, and they got overruled. And so I think you're going to see, you know, more consolidation for non-economic, I don't know if it's not economic, but nonsensical reasons, you know, at valuations that are incredibly attractive. And I, you know, I don't think they get another deal like SPO, but I think you're going to get more of that. I think they're on both the off, on both the rigs and the vessel space. I do think there are smaller companies that have either a lot of leverage, or they're

basically owned by the banks. And I think if the banks can get out at par or something, They're going to be really pushing for, hey, every OSV company, other than Tidewater, has a debt issue. Is it Bourbon or Bourbon? I don't know, whatever the heck it's called, but like bourbon, you know, is in the news. There's a bunch of Norwegian ones that Frederikson's all over, which was thus Farstad, Solostad, which I forget what the name is now. But, like, of the top few, there's a bunch of these things and they all have debt issues. So I wouldn't be the worst thing. Of course, you don't need M&A at all.

And I mean, I think it's good, but I think it's the simplest thing with why this is going to work other than all the reasons that we've talked about, which is, you know, the supply and demands really in your favor. You're seeing increased investment, a sector that just was utterly leveled, completely. just left for dead with second and third order impacts of like people long long tenure employees leaving i mean that's the other thing with new build i don't know where we get the people to staff these boats or or rigs to build the boats and staff the boats and staff them which all else equals is going to lead to you know massive day rate inflation so but um i think it's just as simple as we're probably going to get at least to new build economics, and we're going to get there probably in the next two years. And once we get there, we're probably going to go well through

that, and we're going to sustain rates well above that. And if we just get to new build economics and you put an unheroic multiple, you're penciling out, you know, easy doubles across this space. And, you know, knowing in the back of your mind that, like, we probably can do a lot better than that. So let me ask about valuation here, right? Because you've mentioned doubles, Valeris over 100. It is difficult because you're talking in cyclical industry, right? And I think anyone listening knows both of us think, just to focus on Tidewater, and I walk through this with the Tidewater Management, Tidewater manager says, hey, $18,500,000 day rates. We do $666 million EBITDA. That's probably about $600 million in free cash flow, maybe take a little bit off there,

whatever, but this is a $1.8 billion company that I think there's a line of sight to $600 million in free cash flow or more, given all the supply demand. Like, I do think we're going to get past the $18,500,000 average rates just given that supply to it. But, you know, it is hard for value investors. Look at this. This is a cyclical business, as we've talked about. 600 million in free cash flow, 18,500 day rates, I still think that's well below new build

economics, but, you know, they were doing pro forma. They did $85 million in EBIT in 2021 pro forma for deals, everything. We're talking this massive, massive growth. We're talking a lot of free cash flow on this peak number. I think it could go even better. But how do you think about just valuing these things on a normalized mid-cycle after? Like, how do you think about valuing these thoughts? Just pick your rate, pick the time you're going to get it, and discount back.

But, you know, 18,500 day rate. I think we can go there. I think how do you think about five years out picking a rate, picking a terminal value, all that type of stuff? you can't go five years out like well you know any value investor i understand there's this huge cash flow what i love about these things i think we're going to get all of the market cap all the eb back in the next three-ish years three to four years or something but you know any value investor their typical thing is you go look at a company you figure out what the mid-cycle earnings are and you

slap multiple on it and the tough thing for me looking at a tidewater of layers any of these guys is saying okay we've got all these dynamics you got what is the mid-cycle earnings in the that I'm slapping a multiple on. You can't do that with this. And we are on the stage where I'm putting out a memo on Tidewater, and people are like, I remember that name. Yeah, okay. And, you know, TransOcean may go bankrupt.

And that's why I'm like, stupid math, put it on the sheet, stupid multiple are you penciling out at double yes okay is that reasonably going to happen in two years yes all right what are your bookends because this is energy all right i i just uphold false precision in this space because you just can't do it because these things are going to trade at the end of the day every rig and every osb is going to be scrapped they're all worse zero yep okay and at different points in time, you're going to pay a massive premium to the theoretical now, which is based on that mid-cycle over the remaining useful life of the asset. This is the only time in my career where I can argue with some reasonable certainty that we're probably going to have a market

perception of an extension of useful life over the termancy of the trade, which is like an unbelievable bonus. That's like their average fleet age is 10 years. actually most offshore things have about a 10-year average fleetway and my contention is it's not going to be

a 30 years it's going to be because of where we are with new bill all these assets are going to last another 30 years from today.

I don't need that but like, okay, rates going up, what's a fair multiple five times is a fair multiple based on historic

and also based on the, I walked through in the memo the unit economics that sort of gets you to that and again, I'm arguing if you really have

30 years, not 20, times, not five, but be then as it may. And we're saying $4.50 a day. And we're saying, you know, you're quoting the Tidewater slide that's like the fleet average prior peak was $18,000 a day. You really have to adjust that for fleet composition because they used to have a ton of towing supply.

The deep water, you know, PSV greater than 900 square meter deck and the deck size is really important. Size is important. Oh, God. You can just like, that's with offshore. but like um you know those things we're getting just under 30,000 a day and that's what really what we're saying, which is like my mid case is like you get 30,000 a day in the deep water and just whatever and that's like 700 and change um, the Vibat and then 40,000 you get um,

you know, the billion. So I'm just like, I don't know. My bookends are we're cheap here. Yep. And I think the, you know, where you're going to. going to run in, assuming oil prices stay somewhat stable, you know, in a range, I think you're going to run into this like, you know, it's most pertinent with Valeris, but it's pertinent with every other thing where it's like the near term multiple is, you know, 12, 13 times. That's too much to pay even at some discount rate. What are we going to discount, you know, the fair the future rates back at, I don't know, 20, 20 percent. I don't know. These things are are all on lever, but people hate, hate energy and people don't trust it. So you need wide lanes.

And that's really what I'm saying, which is you can get very, it's not hard to pencil out doubles. And so for right here, I think you should own a lot of it. Would my just real silly math, Tidewater, just to give one example, because that's the one we're focusing on everything, but we, we, I can do the silly math with Blair Sue. Tidewater, I, again, I'm with you, the 18,500 day rates, probably too simple. but they've got 666 million in EBIT on it. Let's just call it 650 to make that math even. If I say 650, I slap a five times multiple on it. That gets me to a 3.2 billion EV divided by 52 million shares outstanding because net depth is basically flat after Q4.

That would get me to a $60 share price. So we're low 30s right there. We're low 60s there. You've basically got your double. I mean, obviously there's a lot, but you're kind of talking, hey, that's kind of the math you're looking at. And, you know, five times EBOD is about six X free cash flow in this thing. You've probably got four years of massive free cash flow. So you're getting most of that $60 per share target-ish price I talked about.

You're getting 40-ish back in the next five years called. I threw out a lot of numbers, but is that kind of making a- Yeah, I give no credit really for cash flow. So I'm just saying on a static multiple basis. Yes, agree. You're going to get all the cash flow. And so like there's the number I'll say, you know, memo, I think I put 80 bucks. You walk through the $60 case. I'm using a higher mid,

but it doesn't matter. Like, plus all the free cash, well, plus, like, let's not forget, every time an energy thing starts working, it gets way overdone by the market. And now the offset is these things are really hard to get to get the last dollar and you shouldn't expect to get the last dollar. But I think from a risk reward. So like, what am I saying? This is super convex, meaning, you know, not a lot of downside. And if it goes, down you're going to like lean into this you're probably your downside is probably time which is you're just deferring and delaying the event before right so you know if this thing goes to 20 you size it up a bunch in like mid 40s you're going to peel back a little bit mid 50s you're going to pull back a little bit

and then you're going to pick your number that you want to run and then at some point people are going to price these things on like i don't know pee or some thing that you're never supposed to do and you're going to have a bunch of tourists talking about book value multiple i don't know it's always something but like you know it will become symmetric risk as opposed to you know convex and then I guess the not for which not to go to trader on people or something but you know I think a lot of people are going to look at I just put up the Tidewater chart and they're going to say oh this was 20 in late September this was low teens at the beginning of 2022 like I've missed this is this up a lot and look everybody would have loved to buying the low teens and ridden into low 30s but to me like

the interesting thing about it today is now we have proof of concept right again the leading rates it's no longer betting on the leading rates we're seeing the leading rates you uh your rates and the utilization and that's the big thing like tidal earn up breaks out by a vessel size of PSP over 900 square meters yep and below you can literally people who understand this industry like the big boats the tier 1 assets are already 85% utilization yep and And the tier two assets. And there's no, like people talk about the utilization of the overall fleet. The things that aren't getting used right now, as you said, the big assets are already

approaching max utilization, the things that aren't getting used, the things that are cold stack or whatever, those are the really small boats, which will come online, but they're not going to move the needle like a 900 meter plus. Right. And so most of Tidewater's fleet is 750 and bigger. And like they've got a lot of boats actually that are like the 750 to 900. And those things are only 70% utilized. they're not getting, I think they're getting like 12,000.

There's a big gap in what they're, what they're getting. That's going to catch you up to the other one, and you're going to have this ratchet where those come up, and then the best assets go up, and then people have to decide what they want to do. So it's, you know, back in rig speak, this is easier for me to explain conceptually, because with PSVs, it's like debt size. With rigged, people see all this mat and they get all excited about 12,000 foot Deb, 8,000 foot depth. Oh, my God. The average deep water rig, I think, drills at 4,000 or 5,000 meters. So it's not that the tier 4 assets don't work for most wells. It's that most guys want. They're like, well, if I can get the Ferrari, I want the Ferrari. I don't really need it. Like a Ford Taurus really gets it done for most of these things. And so what you're going to see now is effectively, not the Ford Taurus is, but I'll say, you know,

the BMWs are going to start really getting priced. Definitely the other thing, too, that's a little bit lost with tidewater that's like super exciting to me. And this also impacts trans ocean more than other things. The drill ship has been the biggest evolution technologically in offshore in the last probably 50 years. And it used to be, if you were going deep water, you had a semi-submersible, which is just like, you know, steel poles.

and it needs to be kept in place by multiple OSVs. You don't have any deck space. So you got PSVs and you got anchor handling stuff and whatnot. The drill ship is basically a merge of a semi with like three different PSVs into one asset. So it can dynamically position it doesn't need anchor handling. You got more deck space and whatnot, right? We are through drill ship utilization. effective, like we're, you know, I don't know, 90% of drill ships are not contracted and the semis

are the latent asset effectively in offshore. And so like TransOcean has a ton of semis that are getting 275, 300 a day. Once we're done with drill ships, there's nothing that's going to stop a semi from getting 450, 500 a day. But also it means for OSVs is we are where we are on utilization with max drill ship utilization. So it used to be that you needed four OSVs for every one deep water asset. With a drill ship, it's not four to one. I don't know what the part of the number is like how far you are because think about like a platform, a PSV is a platform supply vessel. They have to like orbit. It's like, okay, you need one to show up every couple of days. So if you're doing pre-salt in Brazil, you need a lot more. If you're shallow water in the Persian Gulf,

you don't need a ton. We are going to like, but with the semi-submersibles, you need more PSVs. We're at full utilization of the best PSVs in ATHS. God, I would screw that one out. ATHS is the anchor-toeing and handling, whatever. We're basically at full utilization. And then the incremental is going to need more OSVs, which is going to just be this massive up move in rate for both.

and I think it's going to be uprate on the on the drill ship side as well. So I think that's one dynamic. It's a nerdy point, but like I think it's a really big deal. And this is basically saying the other side in a simplified and dumb down way, but, you know, we're there on the milk runs and the brownfield expansions. You know, if you start getting the big green field expansion stuff, which I do think are coming based on, I think Petrobras has a couple. Like, as you said, we're max utilization and we haven't really hit like people are going wild drilling

offshore and we're already basically at max utilization like things could things could get pretty crazy from here offshore we are at 2010 levels of offshore capax from 2010 to 2014 offshore global capax doubled like we're nowhere uh let's see we have covered so much we've bounced around like crazy through a lot of stuff but i just want to ask before we finish up you know we've covered a lot but anything you think people anything you're getting asked questions about or people are talking to you that you think we should hit on the podcast before we kind of wrap it No, that's kind of. I mean, there's always something. Everybody takes like a different angle. And, you know, I think this is a lot. People forgot the asset quality and, you know, what I call the snowball thing, that objects in motion tend to stay in motion offshore. And they're just so used to shale. And these fract truck companies that, by the way, these fracture companies, you know, it's basically you're paying a fractured multiple for an offshore out. it. That's another, you know, super simplified way to think about it. That's like a big one people

get at. And, you know, you touched on the ESG stuff. Like, what are we going to do with oil? I think a lot of these questions actually become very fair if the sector rallies 50 to 75%. But like, great, the sector rally 50 to 75%. Great. I'll have all these debates. We'll have all these debates while we'll pay capital gains taxes and heading to the beach to a yeah yeah i think the other we didn't really talk about opac um and and ukraine and i think the ukraine thing is really interesting just because it's leading to energy nationalism and i that is all like everything geopolitically that's happening the reemergence of of opac which what that does is it tells you that there's a price floor there's a put

and that for offshore when you're talking about multi-year capex cycles the OPEC put being there we haven't even touched the SPR thing because I don't really need to like all I need to know for offshore is like OPEC is there it has your back that's something that it's like the inverse of the Fed put we've lost the Fed put we've got the OPEC put um no I hear you but the reason I didn't touch on it is A because I'm not as comfortable with it but B I don't even think you need it at this point, right? Like, you've already got the rates there. You've already got, like, you don't even need it because, again, it does help because the downside here is oil goes to 40 for a long time or something. And if you've got the put, you can... You sort of touched on it, too, to the last

piece, which is these stocks have run the ton. And, like, people have a little bit of short issues. And to that, I'm just like, dude, it's unbelievable how beat up these things were. And they were, they were rightly beat up because it was written off. And I agree with your point. I think it's a much easier trade now because you approve the concept. When I first started talking to a lot of people outside water and the offshore in general, all of them would go RSI. What is that relative strength index? They'd be like, you can't.

These are up 50% in three months. The RSA is off the chart. And it's like, yeah, but you know, day rates went from 12th, that leading day rates went from 12,000 to 17,000 to those three months. And every dollar day rate falls basically straight through to the bottom line. Like it seems like a, it seems like you've hit the inflection point. And yeah, you're paying up more than you were three or four months. months ago, but we've seen the inflection point. Like, I'm paying for a little more certainty.

Cool. Anyway, why don't we wrap it up there? Guys, again, I mean, the write-up was so good. I'm going to include a link to the write-up to the show notes. I've got the link to the write-up in the spaces. So everybody will have Judd's contact info to hit them up with any questions here or, you know, if you're a bigger fun than me to talk about all the other services the offer. But, Jed, this has been so great. Thank you so much for coming on and thanks for having it. Again. Awesome. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast.

Please do your own work and consult a financial advisor. Thanks.