Tidewater, the largest publicly-traded operator of offshore vessels and marine support services for the offshore oil & gas industry filed for Chapter 11 bankruptcy proceedings on May 17, one week after announcing that it had reached agreement with creditors on a pre-packaged plan. The company provided a rough outline of the terms of the agreement in a press release, which makes it possible to glean some insights into what value it ascribed to its business and how it has allocated that value to the various claims and interests.
According to the press release, here is a summary of terms:
1. Debtholders with total claims of $2.04 billion, will receive:
a. $225 million in cash,
b. $350 million of new 8% fixed rate secured notes due 2022 and
c. common stock representing 95% of the pro forma common equity of the reorganized company (subject to dilution from Tidewater’s management incentive plan and warrants issued to existing stockholders).
2. The existing shareholders, whose shares will be cancelled, will receive:
a. Common stock representing 5% of the pro forma common equity of the reorganized company (subject to dilution from Tidewater’s management incentive plan and the following two classes of warrants).
b. Series A Warrants to purchase 7.5% of the pro forma equity of reorganized Tidewater (with a 6-year term and exercise price based on a post-bankruptcy equity value of $1.71 billion) and
c. Series B Warrants to purchase 7.5% of the pro forma equity of reorganized Tidewater (with a 6-year term and exercise price based on a post-bankruptcy equity value of $2.02 billion).
Using the two series of warrants, it is possible to back into an implicit valuation of the equity of reorganized Tidewater and estimate the recoveries for both the debtholders and equity holders.
Using Ashwath Damodaran’s valuation model for long-term warrants and solving by trial and error for a solution that equates today’s $35.2 million equity market capitalization of Tidewater to the sum of the values of the Series A and Series B warrants and the 5% equity stake in new Tidewater, I estimate that the bankruptcy plan’s implied value for new Tidewater’s equity is $440 million. This is composed of a value of $8.2 million assigned to the Series A warrants, $5 million assigned to the Series B warrants and $22 million assigned to the 5% equity stake. Together, the values of these three securities equal the current $35.2 million equity value of Tidewater.
The values of the warrants were calculated with the following common assumptions: $440 million for the current stock price, 6-year term, 30% volatility and a Treasury bond rate of 2.25%. The assumed strike price on the Series A warrants is $1.71 billion and on the Series B warrants $2.02 billion.
A value of $440 million on the new Tidewater equity would give bondholders a recovery of $418 million for their 95% equity stake. Together with the $225 million of cash and $350 million of new secured notes, the plan is therefore worth $993 million to bondholders or 48.6% of the face value of their claims.
I cannot compare this to current trading prices on Tidewater’s bonds, primarily because they are not included in the SEC’s TRACE system (and I do not use any other bond pricing service). In its fiscal 2017 third quarter 10-Q (for the period ended March 31, 2017), Tidewater said that the fair value of the notes was 55% of their face value. Both the high yield market and CCC-rated bonds are up about 2% since then, but it is not clear whether Tidewater bonds would have performed in line with the averages, given that it was in the midst of restructuring talks. Still, 48.6% is not that far off from 55%, so I believe that the plan and recovery valuation parameters that I have calculated above are reasonable estimates.
At this point, I do not know much about Tidewater, except that its financial performance mirrors that of many of the offshore drillers. Offshore drilling activity has suffered sharply in this energy downturn in large part because the offshore has the higher marginal costs and requires the larger capital commitments than most other oil & gas resource plays. Participants are seeing early signs of a recovery in the sector, but most say that it is still too early to call a bottom.
At first glance, while I would like to see the company’s financial projections and valuation model, I do like the structure of the plan. I have suggested in previous reports that equity holders are entitled to far out-of-the-money warrants in cases where they are getting substantially wiped out. This plan gives them the possibility of getting back 20% of the equity, even though the strike prices are more than three times the implied equity value of new Tidewater. The strike prices do seem a little high – under my analysis, the bondholders are taking a $1.05 billion dollar hit, so a strike price of $1.5 billion (i.e. $1.05 billion plus the current or starting equity value of $440 million) seems fair. That would be less than the proposed $1.71/$2.02 billion. Existing equity holders should also get a higher percentage of the company at the $1.71/$2.02 billion valuation, given that bondholders would have fully recovered their claims by then. Nevertheless, I think it looks like a pretty good plan for both bondholders and stockholders.
Based upon this quick-and-dirty analysis and assuming that the plan is approved as proposed, I think that TDW’s stock at $0.75 actually looks attractive for those who are willing to buy and forget about it for the next 2-3 years. I believe strongly that there will be a rebound eventually in the offshore oil & gas industry and Tidewater’s stock looks like a relatively safe way (given the stock’s low price) for equity investors to participate in it.
May 29, 2017
Stephen P. Percoco
Lark Research, Inc.
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