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Judd Arnold from Lake Cornelia Research Management on Offshore and Tidewater $TDW (Episode #147)
Judd Arnold discusses how the offshore place is at an inflection point and why he thinks Tidewater (TDW) is the best way to play it. You can see Judd's initial piece on TDW here and Judd’s TDW TWTR space here.
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Transcript begins below
Andrew Walker: Hello, and welcome to Yet Another Value podcast. I'm your host, Andrew Walker, and if you like this podcast, it would mean a lot if you could follow, rate, subscribe, review it, wherever you're watching or listening to it. With me today, I'm happy to have Judd Arnold. Judd, I don't know what title to call you. I guess, a private investor. Judd has done phenomenal work on soccer, and we talked about it, but Judd, you can call yourself whatever you like, but hey, how's it going? Thanks for coming on.
Judd Arnold: No, thanks for having me. This is great.
Andrew: 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. We're going to be talking about, I think offshore space in general, with particular focus on Tidewater today. Every company that we've talked about has gone bankrupt, at least once, maybe twice in the past 5 years. So, if that's not a disclaimer saying, "Hey, please do your own work, not financial advice, consult financial advisor, I don't know what 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 the link to it, you did this great space 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 want to have you talk about Tidewater into Offshore space in general. So, I'll kind of pause my rambling there, and just at a high-level, what's so interesting about Tidewater in the offshore space in general to you right now?
Judd: It's the inverse of 2012, 2013, 2014, 2015. That's what's interesting about it. 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. That was just an awesome trade setup. So, energy is my original sector. I started at 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 at the second one too, with some other stuff too. So, I thought energy as a sector was dead for 7-8 years. I was just coming back to it over the last year.
The setup here is just so fascinating, and ultimately, 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 have to come out any wrong, you're just going to get slaughtered. So, you need to create really interesting risk rewards. I think with offshore specifically, I get this question all the time like why offshore or OSVs, which are offshore vehicles which is a fancy word for a boat. It's a 30 - well, now they say newbuild's like a 60-70 million-dollar operation for OSV drilling rigs, Deepwater rigs are now a billion dollar assets.
You think about that asset quality versus a frac spread, which is effectively a diesel truck. Well, now, they got electric, whatever. A 10-million dollar asset that's going to get run to the ground in 5 years. Big replacement cycle, and anybody can run a frac spread. It just doesn't matter. Offshore, it's like these are big assets. They take 3 to 5 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 outsourced it on the rig sites, the big rig operators, be it Valaris, which is I always call Ensco, Transocean, Noble, Diamond Offshore, Seadrill.
Then on the OSV side, you've got a bunch of people, mostly companies are actually private. You got a bunch of Norwegian entities, but that's another super interesting one as well. They sort of work very well in tandem. For every rig, roughly, you need 4 OSVs.
Andrew: Perfect. So, there's a couple things I wanted to dive into 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 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 and released the side just with Tidewater's management that you can go listen to their talks about. But can you talk about, you say 12 to 14, this is the inverse, what was 12 to 14 like, and why is this the inverse?
Judd: Twelve to fourteen, it didn't blow up until 14 when OPEC, effectively stopped defending price. You think about offshore versus onshore. Offshore is a long cycle. If you and I own an EMP company, we're drilling off Guyana or wherever, we're making a 5, 6, 7 year-bet on prices. At that board meeting, the board deck is, this is a 5 to 10-billion-dollar commitment. Once this thing's built, it's going to flow a huge fixed cost, very low variable, and so forth. You think about Shale, it's the inverse of that, which is the wells used to be 10 million bucks a pop. Now, they're 7 to 8 or probably going back to 10, but with onshore cost inflation. But you get back all your capital within, I don't know, 2 months.
Then you've got this really big tail, and huge decline rate, what have you. What you saw in 14, once OPEC stopped defending and Shale became ascendant 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," which is not. This was one offshore which had sort of a crescendo. So, right before the OPEC buzz and Shale, you want a new build order book that was 30% of the existing fleet. So, it wasn't just that existing assets, got be cade like, you were just dead, right? It was over like, it was going to take or what I thought was more than a decade to sort itself out.
What turned out was a lot of these guys came out of bankruptcy in '17, '18, '19, and then it was still crap. You look at the supply and 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. Then right as COVID, sort of ruled through, you're like, "Wow, Shale's kind of peeking out. OPEC's now defending price. OPEC's kind of back, and I graduated college in '04. So, about half my career was pre-Shale. It was a hundred bucks a barrel. It was just normal. Natural gas is 7. The TXU, which I guess, I'm really dating myself, we sat there, we're like, "Okay, Buffet is buying 675, nat gas I guess. It's actually not a bad trade.
Andrew: The TXU went so funny because Buffett took a bath, everyone took a bath in it. That was the most complex one. Last year, people were going crazy about - I'm only talking domestic, obviously $100, nat gas in Europe is different, but people were going crazy because nat gas was touching 8 or $9 for a month or two here, domestic. It's like, "Hey, 10 years ago, that was kind of the baseline pricing here, and obviously Shale has changed that nat gas, but yeah, 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've said, about 30% of the global supply. I even was teasing Tidewater about it. You can go back to the Tidewater deck in 2013, and they were saying, "Oh don't worry about all these newbuild. It's only 15 or 20% of the global vehicles, and we're going to have a retirement." So, we'll only come for the charms."
Fast forward, 10 years, and like, what you're having now is the kind of 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 to come online. I do want to talk about the supply dynamic, but you haven't had boats. You have no new-build boats. As you said, it would take 2 and 1/2 half years. You're starting to see drilling happen again. So, demand is going up, and that supply response can't really come off online because all the excess supply from years ago is getting taken out, and there's no new builds coming on.
Judd: I mean, think about this for a second. Tidewaters right now is trading at 1617 EV, all right? They've got just under 200 boats. New build is somewhere between 60-70 million bucks. 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. They've got 200 that are roughly 10 years old. I get that, but in terms of my old world, back in 1213, you were always worried about these guys building, and building. It was just a constant thing with this fleet refresh garbage that the street supposedly wanted. I don't think they ever did.
Now, you talk to these guys, not only are they out of work; they can't order. Like, it's not credible for you, all the yards went bankrupt. All the South Korean guys did. Most Chinese yards went bankrupt. That's the other thing. Once that assembly line stops, nobody really knows what it costs to build the rig or an OSV because we're not building them. If you don't build them, think about the F-35 program like, what is a prototype F-35 cost versus 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 laid that plus just the dollar amount versus the EVs of these companies.
So, for a tie bar, like I said, "Is it really credible that they're going to show up to a yard, and be like, "Yeah, we want 3o OSVs." The yard is 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 60%. I mean, I have 40, so, even if they wanted to, with the Deepwater rig guys, it's even crazier. Valaris' depending on how you want to value, ARL call it a 4.5-billion-dollar EV. I think they've got 38 or 39 Deepwater rigs in a bunch of jack ups, whatever. Literally, the market value, the entire enterprise value of the company would be to work via 5 rigs, or which would admit, it wouldn't move the needle.
Obviously, they can't order 5; it's not credible. So, think about 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." They're going to go to the yard, whoever it is, and the yard is going to tell him to go pound sand unless you get a parent guarantee. So, then the rig guy or the OSV guys are going to go back to the BP or whoever and say, "They're telling me, I need a guarantee, and you're going to have to give it."
Andrew: 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 glut of oversupply. You've got all these [crosstalk]
Judd: It's like 90% fixed costs on the income statement. So, day rates go up. You get it all; day rates go down, you get slaughtered. What happened was these guys lost on 2 metrics, right? Utilization went from - you can't really run an OSV more than 90% of the time because there's dry docks and the crew changes, and all the other stuff. Same thing for a Deepwater rig. But utilization, I think round numbers for the industry went from low 80s to 50. Day rates went from, for really good stuff went from 28,000 to 12. No, actually 10. I'm sorry. So, you just got slaughtered on everything, and then you dumped a bunch of new boats into it, and none of this cap,
they financed all the new build obviously with a ton of debt. All these guys had a ton of debt. It just was like a game set match, goodbye.
Andrew: But on the new build, I just want to drill it down with a separate now versus 8 years ago.
Judd: Yes. So now, you can't build, and I touched on all these points, and they're huge because what I am really saying, in every offshore investor's mind is, "This management team is going to screw me." 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 have it 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 deposit. It' used to be 10% down and the yard would finance you. Now, it's like 40-50. It's going to be 5 years. Forget about it. Like, the yards just don't want this stuff. They're building other stuff, LNG carriers, regular shipping vessels. Like, they don't want this stuff.
So, even if you have a management team go rogue, or more than likely, you have the EMP producer, go to the rig company or the OSV company and say, "I want the new one. You're going to get it for me or else." Like, you just can't. There's so many points on that chain where it just won't happen. So, it's not that we're not going to have new builds this cycle. Of course, we're going to have it. You, at least, have a 2 to 3-year period where the amount of new build that you're going to have ordered is negligible. Then once they order, you're going to have another 2 to 5 years before he even hits the water.
So, you've got this period right now where rates have already inflicted, 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 compositions are way better now, but they're going to be 15 leading hedges probably 16,17 right now, across all their vessels, with their best ones are all ready, and they just got a contract of 40,000 a day. If we talk about this in Deepwater rigs, I like doing that because the assets are more uniform, and as Deepwater rigs go, and that way [crosstalk]
Andrew: It's a good time because rigs just priced a bunch of contracts last night. So, we've got like literally 24 hours up-to-date pricing.
Judd: So, deep water, it's super easy. OPEC is 200 a day, round number. Okay? We bought them today at rates at 200 A. So, operators were like, "I make nothing, but I keep the crew, which is really important." That's what people didn't understand on the way down, which these guys aren't going to stack all the vessels. Basically take them off the water because they do that, they lose all the expertise of the crew. So, you have to keep operating, and it's crazy. The same thing happens in trucking, and there's a few other industries like this, where 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 call it low 400s. We peek at the last cycle called 66 and change. Newbuild economics depending on how you want to debate what discount rate somewhere 475-500. Think about drilling is roughly a third of the cost of a well offshore. It's really hard to get unit economics. That's like the holy grail of the offshore excel nerd, trying to do unit economics. The easier things is just understand the day rate trend because it's like this massive game theory thing. If you know one and the other, these things are massively in the money.
So, we're already seeing like, a year ago, you had to make all these speculative calls where you're like, "Oh, this looks really good." Then in the back of my mind too, again, versus Shale, this is a long cycle. Offshore is a snowball going down the hill. Once it gets moving, it's like turning an aircraft carrier where you are, or Shale is like turning a fighter jet. They can turn it on; they can turn it off. Offshore, once you commit, you're committed. We're seeing that pickup, 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 0SVs is utilization of these fleets. Once you get to 80, day rates just start inflicting.
Andrew: It gets really tense right from 60 to 65% utilization, who cares? There's still tons of boats, but once you start getting at 75-80%, all of a sudden the operator start looking around saying, "Oh, we can't bid them at OPECs costs anymore because things are tight." As it goes 80, again, as you said a rig, which is much more expensive than 0SV for people. Tidewaters, OSV rig, Valaris, those are all the rigs. They're much more expensive, but there's still a third of the well's cost. So, if you go from $400,000 a day to 420,000, it's not that much in the grand scheme of an 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 that?
Judd: 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.
Judd: The old offshore - no, it's Brownfield.
Andrew: Yeah, sorry, Brownfield, yeah.
Judd: Like, we shut off offshore. For the next 3 years, they know where all the oil is. It's been on the shelf. So, Shale, we're like a parent-child. We're like, "Okay, we're going back to Utica. All right, we're really going bottom of the barrel." It's crazy stuff. It's if you're like a foodie in Manhattan, they just shut off like, the West Village for 10 years. Then they just turned it back on like everyone knows what restaurants they want to go to, and they're really good. So, I take all that, and I'm like, "Okay, what's your day rate?" They've all dealt like tie bars, got no debt, and you've got a restrictive bond. Val's got a restricted bond. So, Tidewater's 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 2022, they're going to require this spot, so they really can't do anything crazy. Then I think they're going to pay out cash flow anyway because your management team, you've lasted this long. I think everybody's going to be a little bit like Valaris where they're going to be a little bit conservative because they're like, I almost lost my job and my career. You're like a 56-year-old offshore oil executive like you know, "This is it, man."
Andrew: Some of the many famous last words in investing are trusting oil and gas management teams, but I'd encourage anyone, go listen to the Tidewater podcast, I just did. Bob Robotti is on the board, and I think Tidewater is clear. I think Bob knows his stuff. I think that he's going to communicate to the border, I hope, 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 creative 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.
Judd: I think it's all going to be capital return, and I think the big thing to remember too is Tidewater, 10-year average fleet. These boats can stay underwater for another 30 years. The dry dock gets a little bit more expensive, and you lose a little efficiency, but most of my math. So, like the fair multiple because if you do a single ship, GCF, and I have it in the memo. I put out with a 15% cost of capital basically, you should back into with paying a seven times multiple year one, on that asset. By year 10, it's like worth 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; it's fair. Maybe we'll discount that a little bit for a 10-year rate average fleet because those last 10 years we're going to get more. The dry docking is going to be like, "Okay, this piece of the whole corroded. I mean if we put up steel wall boards to keep the water out, you're going to lose some hydro dynamic efficiency on it. But whatever, this thing, here's the joke. Like Tidewater could do a billion of free cash flow at newbuild economics.
Andrew: Let me... go ahead. Did you want to say something?
Judd: Yeah, and a 1.5 billion EV, and we could reach newbuild economics, likely go through it within the next 18 to 24 months. 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 newbuild economics are likely to be hit within 18 to 24 months. Maybe if for me, 36, and that's a billion of [inaudible]
Andrew: So, that's actually what I was going to say. Like, when I look at Tidewater, and I've got a position in Tidewater all disclosed. You put the memo out. I'm sure you've got a position in 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'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 price has 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, unlike 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 get rocky for 6 months or something, but 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: newbuild, economics are still above the 30,000 rate, right? So, you need rates to go even higher to even starts incentivize newbuild.
Then as we've talked about, it would take 2 and 1/2 years minimum, if you started a new building. 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 were already seeing the rates. You're going to have this huge cash flow gusher and we're having all that without even hitting supernormal profits that would start to incentivize the new goal. It's just like all these great things like, all the [crosstalk]
Judd: You can't really new-build right now, if you wanted to, and that's the huge thing. So, we're going to sustain economics way longer, and so we can debate whether it's going to 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, which it just doesn't matter. The things so darn cheap.
Let's talk about the offshore space in general, well, right? I think the two areas people can play is you could do the 0SVs, 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. Your offshore driller is the ones everybody looks at is, it's really Valaris, Noble, or if you want a lot of juice on the outside because it is really levered because it's the one doesn't go bankrupt, Transocean. You publish the memo focused on Tidewater. So, I do want to ask like, obviously a lot of the dynamics we're talking about apply to all the sectors, a little bit different, but why focus on Tidewater versus a Valaris, Noble or Transocean, which would give you that massive upside over there?
Judd: Yeah. I touched on this a little bit in the memo. Like Tidewater is 50 million shares; it's not super liquid. So, you're going to buy what you can buy, and every investor has a different paying threshold in terms of how much liquidity they want. You can't really trade around it, and I told 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 up the most with Valaris, which is the best asset, I would say, but it has the worst contracting position by far.
So, it's like the next year multiple on Valaris is like 12-13 times EBITDA, when an open base is by far the cheapest on a price to NAV. It's super cheap. You're just not going to get the [inaudible] that cash until probably 2025. Then you got the rig which is the most open. You're going to reprise most of the fleet in 2023, but you have a lot of leverage. The thing is super leverage, and I'm going to distress that dude. So, at least my first 2 hedge funds were so, for me, it's like, "Okay this thing is plainly obvious and, it's never filing for bankruptcy. We're fine, but I get that people don't want that.
Andrew: If I'm with you, but you look at those numbers and the debt, and Rig is really interesting for people who don't know. They basically, at the top of last cycle, signed 10-year contracts with the Shale, right? I think with Shale, 10 years, contracts top of last cycle. Because of that, they were so levered, but those 10-year contracts let them go through all of this, and kind of come out the other side without filing. Everyone else had to file, and rig is interesting so because of that, they're super levered. But it's also interesting as a story of, "Hey, in 2 years, if this cycle plays out, you could see a lot of people kind of pulling the Transocean signing some really long contracts that are really nice multiples, and just returning all that cash to shareholders or something.
Judd: I think they're just all going to return. I think this sector just works in general. Part of why I put a note on Tidewater was just the other ones are covered. Tidewater really is, and I think Tidewater could benefit from being highlighted. So, part of what I do now in my career, which is sort of more if I left hedge funds, right before COVID, and then got roped into a few things. What I do now through Lake Cornella is I'm a consultant to a few hedge funds and family offices, mostly mid-sized guys. Basically, the pitch is, you could hire a guy full-time for - I don't want to sound like a hedge fund chair - but that guy cost, if you're a 50-60-million-dollar family, offers up to 500 million dollar hedge funds or even a billionaire hedge fund.
A quality guy cost a couple [inaudible], and that's real money. Most people who run these funds are used to working with people at a different level. 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 adventure, and stuff and whatnot. All the money is on your books, 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.
The thought was, one of my bigger clients wanted me to be more public on Twitter, and then that sort of evolved into putting stuff out, and sort of with Tidewater, she said, "Look, I didn't put anything out in a while. I just looked at it." People seem interested. I could highlight something that isn't covered and not in a pumpy way because everybody really pumps it, but let me lay out all the work. People already looking at the space. I think this is really interesting, granted it's a billion five market cap.
I think people should look at it, and just start a conversation, and whatnot. I was really stunned with how many people listened to the spaces. I thought the company was released. I think everybody was really stunned. Like over 6,000 people listened. I think going forward, I'm going to do a lot more of it in situations like that. Like, I have nothing to add on that.
Andrew: You know what? That's the thesis behind this podcast too, right? I mean I guess sometimes we'll do larger companies, but I will just say, people should go look at this. I said at the beginning, the space was awesome. The note was awesome. It was obviously right in the wheelhouse, but yeah that's the dream. Uh, let me ask you a few other questions about this. Look, I'm bullish on this. You're bullish on this. Again, people can listen to the companion podcast on this. Tidewater management is pretty bullish. A lot of people are going to hear this, and 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 57 years in the space, but the famous thing in commodities is that people are calling the 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...
Judd: I don't think oil is going to 40 stops. I think it pauses it, and my note that I put out, I start with the macro and look, I started as a commodity investor. So, you always start with supply-demand depending on where you are in the cycle. The supply-demand is either in the front or it's in the back. 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. Most of that was as China was 2/3 of that demand increase, and the Middle East and a few other emerging areas were the rest of it. So, in a non-developed world, and from a supplies perspective, Shale was I think 11 and 1/2 half or 12 million barrels a day of that 15. You think about it prospectively, what do we do? Shale's picking in the US. So, we're back in my mind to this world where offshore which is 25 million barrels a day, five of which is always through Deepwater. The rest is continental shelf, 20 million barrels a day.
You're looking at an 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 jack ups fleets in the world is going to be in the Persian Gulf. OPEC is just going nuts. What does that tell you? Like we're in real trouble. So, I don't know if in the next 10 years, we will grow on demand by 15 million barrels a day. I don't really need to. Like, it's going to grow like China GP per, what is it, oil use per capita numbers? I mean, the numbers are massive.
In India's well, which is incredibly ascendant, I mean, I'm dating myself a little bit, but the operating numbers used to be 5-10 years ago that if China goes to Mexico oil use per capita, that increases 18 million barrels a day, which is US demand. If India goes to China at that point in time, not that India isn't going to increase in those round numbers. India and China, basically seeing number of people that increases 6 1/2 million barrels a day. It's just these numbers are stripes are huge. Now, you don't have to buy into all of this crazy peak oil, all this other stuff to know that on the margin, offshore spending is going up because that's where the oil is, and we need it. I think it's as simple as that.
We've seen fleets of rigs and OSV 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 ran. The biggest oil guys in the world, the Middle East, OPEC is spending a fortune in the shallow water for Persian Gulf. Like, this is happening, and so yeah, oil can go negative. Now, we have that joke, but like, on a 2-3 year basis, I'm just thinking that if oil washes out, like you're just going to buy all this stuff because Shale is gone.
Andrew: 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 supply curve for oil mapped out," right? Oil can never go below 65, again, because that's where the marginal barrel comes at. Eighteen months later, oil is lingering at 40 or something. It's just gone through, and I just worry like again, Tidewater, there is a point. I think from what I've heard from the management team, it's like the high 50s. If the forward curve kind of drops low, 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 the nat gas guys in the middle of last year. So, middle of 2022, and nat gas, the new 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, today we're talking four. I realized it's so different, but I'm just throwing thoughts.
Judd: Yes, 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 described 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 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 base and suddenly, it just doesn't sound like there is one, 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 based. Again, like first, a frac track, or I remember when sand was really big. This guy worked who had the best Wisconsin white dramatic thing. The guy is like incredibly successful, co-runs a massive fund, but I always got a kick out of him being like, "Wisconsin white, how's the Wisconsin white?"
We do all these meetings with these guys, and this is back in, oh God, '12-'13. Guys would come in marching, and they'd be like, "We can do all of it at one time, cash flow. We can build." I'm like, "Don't tell me that, buddy, that you can do it. If you can do a new sand mine in 4 months, and it's one time, cash flow, and we're going to have so many sand mines. Same thing with fract tracks, and all the other stuff. You take offshore like, this is why I'm so myopically focused on the new build which is use of really expensive assets. Like it's always been, now is 60 million bucks, and now we're going to play this tape back. I keep saying 60, 70, 80, because I don't really know all the boats have different specs, and whatever.
Andrew: Tidewater slide, I'm looking at Pareto deck slide 21, they think it's 65, but as you said, who knows? Who knows what steel price is going to be when you start building these things?
Judd: Who knows? Like for offshore rigs, they say it's a billion. Like it's probably a billion too, might be a billion, but we just don't know. The point is time to build is way longer. It's at least 2 years. It's probably 5. Well, the Deepwater rig is probably 5, but I was feeling it's probably 2, 2 1/2, whatever. That's a long time to maintain. It's just not going to get taken away with gas, they drilled another like, we have so much gas. Like the world is a wash in gas. So, I think the sustainability of the tightness is not comparable to other things. That's what creates the convexity of the trade.
Andrew: Let me go through a few other things on the new build side. I'm sorry to keep focusing on new build [crosstalk]
Judd: No, it's okay.
Andrew: It's one of the things I love about this. Like, "Hey, yes these guys are going to make money at 30,000 day rates, but this is 0SVs, but they're going to make money at 30,000, but newbuild economics requires probably 40,000 or more plus sponsor guarantees. Let me just go through a couple more things. First, I think this is more applicable on the rig 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 long term, but if you're buying a 20-year asset, could you really look out to 2038, which is 15 years from now and say, "For sure, we're going to be offshore drilling." If not, you've really got a 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 the factor, and even higher data rates in the short term to account for that questionable 15 plus your terminal value, if that makes sense.
Judd: Yeah, you're touching another piece though, as well, which is like interesting on the stock selection, which is 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. Like, I think five might be the maximum duration that they're willing to do, and do that capital multiples of the stocks. Now, the only offset to that is just to buy back a ton of this, to buy market on the shares. Do you really care?
Certainly at this, where these stocks are valued right now, I just don't think you care because I have this table, I put the report. I was like, "All right, let's just do a 5 times multiple on 450 a day for the Deepwater guys, and for Valaris, that still 120% from here. But like, are you going to break through 5 times EV to offer this business? I don't know, and it may be just be one where you perpetually trade with a higher free cash flow unit or whatnot because people see that this is like this special moment.
I think that's something to consider, I'm sure, the next chess move. I'm very at peace with that right now because like I said, I still have five times multiply on 450 a day. I'm like, I'm still penciling on 100% percent return and even if I don't get the [inaudible] with Valaris for the next two and a half years because where they've contracted out. Like this market is horrific, right? I'm saying the stock market, not the actual market. Like, you can comfortably pencil out with conservative returns like a double in two and a half years. It's 20% higher or is it double in three and a half years. So, like it's pretty...
Andrew: It reminds me, this is such a... but the terminal value questions and all sort of questions, it reminds me a little bit - we're having to talk apples-oranges - 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 these types of stuff, and they just print a bunch of free cash flow, and they return it all to shareholders, and you do great over a 20-year period. Obviously, in 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.
Judd: But you know...
Andrew: Go ahead.
Judd: …that's not a bad thing either, because, look, "Tidewater the other thing that I really liked about it going back to the history of what's happened, and what I like about this management 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. Like, they bought the GLF merger then SPO, and unbelievable. What I would say is a steal, but look at SPO. This is the upside of the tobacco, ESG, whatever you want to call it. SPO on energy conglomerate, they just said, "We don't want to be in boats anymore, and will take a stupid price." Because I think [crosstalk]
Judd: Tidewater or EVs got a great deal, and it looks even better in hindsight because they did it right before they had a thesis. The market is starting to turn. We're starting to see new rates and they did it, and they had to do it with some warrants for a lot of different reasons, but they did it. SPOs probably happy those warrants the Tidewater sock went on.
Judd: I mean, those warrants are really through shares, right? Because they're penny worth,[crosstalk]
Andrew: Penny worth, yeah. I'd say more [crosstalk], yeah.
Judd: Yeah, but I think the SPO point, I bet you, if you talk to the SPO division guys, they probably won't be kicking and screaming like, "Pause." Like, "I know all these fees are a small part of SPO, but like why are we getting rid of these things? The sector's just about to turn, and they got overruled. So, I think you're going to see more consolidation for non-economic - I don't know if it's not economic - but nonsensical reasons at valuations that are incredibly attractive. I don't think they get another deal like SPO, but I think you're going to get more of that.
Andrew: I think they're 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. I think if the banks can get out that par or something, they're going to be really pushing for, "Hey[crosstalk]
Judd: 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 is in the news. There's a bunch of Norwegian once that Frederickson's all over, which was [inaudible], which I forgot what the name is. Like, on the top, there's a bunch of these things, and they all have debt issues. So, wouldn't be the worst thing. Of course, you don't need M&A at all. 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 the supply and demands really in your favor.
You're seeing increased investment. The sector that just was all really leveled completely just left for dead with second and third order impacts of people long tenure employees leaving. I mean, that's the other thing with the new build. I don't know where we get the people to stuff these boats or rigs...
Andrew: To build the boats and stuff the boats.
Judd: …and staff them, which all else equal is going to lead to massive day rate inflation. But I think it's just as simple as we're probably going to get at least a new-build economics, and we're going to get there probably in the next 2 years. Once we get there, we're probably going to go well through that and we're going to sustain rates well above that. If we just get to newbuild economics, and you put an unheroic multiple, you're penciling out easy doubles across this space, 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 Valaris over 100.
It is difficult because you're talking in a cyclical industry, right? I think anyone listening knows both of us think just to focus on Tidewater. I walked through this with the Tidewater management. Tidewater management says, "Hey 18 and a half thousand dollar 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 dollar 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 18 and a half thousand average rates just given that split.
But it is hard for value investors. Look at this, this is a cyclical business as we've talked about. Six hundred million in free cash flow, 18 and half thousand day rates, I still think that's well below newbuild economics, but they were doing pro-format. They did 85 million in EBITDA in 2021 performer for deals and everything. So, we're talking about this 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 the stocks?
Judd: Just pick your rate. Pick the time you're going to get it, and just count back.
Andrew: But 18 and a half thousand day rate. I think we can go there. How do you think about 5 years out picking a rate, picking a terminal value, all that types of stuff?
Judd: You can't go 5 years out.
Andrew: Okay. Well, 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 EV back in the next 3 years, 3 to 4 years or something. But 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. The tough thing for me is looking at the Tidewater of layers, any of these guys and saying, "Okay, we've got all these dynamics." What is the mid-cycle earnings number that I'm slapping a multiple on?
Judd: You can't do that with this. We are on the stage where I'm putting out a memo on Tidewater, and people are like, "I remember that name." Okay? Transocean maybe go bankrupt, and that's why I'm like stupid math. Put it on the sheet. Stupid multiple, are you penciling out a double? Yes. Okay. Is that reasonably going to happen in 2 years? Yes. All right. What are your book ends because this is energy, all right? I set a full force precision in the 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 OSV is going to be scrapped. They're all worth zero. Okay?
At different points in time, you're going to pay a massive premium to the theoretical NAV, 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 term and see if this trade, which is like an unbelievable bonus.
That's like their average fleet age is just 10 years. Actually, most offshore things have about a 10-year average fleet life. My contention is it's not going to be 30 years. It's going to be that because of where we are with newbuild, all these assets are going to last another 30 years from today. I don't need that, but okay rates going up. What's a fair multiple? Five times is a fair multiple based on history and also based on the, I walk through the name of the unit economics, it sort of gets you that.
Again, I'm arguing if you really have 30 years, not 20 year or seven times, not five, but be that as it may, and we're saying 450 a day. We're saying, "You're quoting the Tidewater slide that's like the fleet average, it 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, PSV greater than 900 square meter deck, and the deck size is really important. Size is important. Oh God, you can just go nuts with offshore, but those things were getting just under 30,000 a day. That's really what we're saying which is my need case like, you get 30,000 a day in the deep water and just whatever. That's like 700 and change of EBITDA, and 40,000, you get the billion.
So, I'm just like I don't know, my book ends are, we're cheap here. I think that where you're going to run in assuming oil prices stay somewhat stable in a range, I think you're going to run into this like, it's most partnered with Valaris, but it's partnered with every other thing where it's like the near term multiple is 12-13 times. That's too much to pay, even at some discount rate. What are we going to discount? The future rates back at, I don't know, 20 %. I don't know. These things are all in [inaudible], but people hate energy, and people don't trust it. So, you need wide lanes. That's really what I'm saying, which is you can get, it's not hard to pencil out doubles, and so for right here I think you should own a lot of it.
Andrew: Just real silly math, Tidewater, just to give one example because that's what we're focusing on everything, but I can do the silly math of leadership. Tidewater, I again, I'm with you. The 18 and a half thousand day rates, probably too simple, but they've got 666 million on EBITDA. Let's just call it 650 to make that math even. I'll say 650, I slap 5 times multiple on it, that gets me to a 3.2 billion EV, divide it by 52 million shares outstanding because net depth is basically flat after keeper that would get me to a 60 dollar share price. So, we're in the low 30s right there. We're in the 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." Five times EBITDA is about 6X free cash flow in this thing. You've probably got 4 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 5 years called. I threw out a lot of numbers, but is that kind of making it?
Judd: Yeah, I give no credit really for cash flow. So, I'm just saying on a static multiple bases, but yes, I agreed, you're going to get all the cash flow. So like, there's the number I'll say, in the memo, I think I put 80 bucks. You walk through the $60-case. I'm using a higher NIV, but it doesn't matter. Like plus all the free cash flow, plus let's not forget every time an energy thing starts working it, it gets a way overdone by the market. 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, what am I saying? This is super convicts, meaning not a lot of downside, and if it goes down, you're going to lean into this. Your downsize is probably time which is you're just deferring and delaying the inevitable, right? So, if this thing goes to 20, size it up in a bunch, and like mid 40s, you're going to pull back a little bit. Mid 50's, you're going to pull back a little bit, and then you're going to pick your number that want to run. Then at some point, people are going to priced these things on, like PE or something that you're never supposed to do. You're going have a bunch of tourists talking about book valuables. I don't know; it's always something, but like it will become symmetric risk as opposed to convex.
Andrew: Then I guess, not to go too trader on people or something, but I think a lot of people are going to look at - I just put up the Tidewater chart, and they're gonna 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 in. Look, everybody would have loved to buy in the low teens and written into the 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.
Judd: Your rates in the utilization and that's the big thing. Like title are not breaks out by vessel size of PSV over 900 square meters, and below, you can literally - people don't understand this industry - like the big boats, the tier-1 assets are already in 85% utilization, and the tier 2 assets [crosstalk]
Andrew: People talk about the utilization of the overall fleet. These 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.
Judd: Right, and so most of Tidewater's fleet is 750 and bigger. They've got a lot of boats actually that are like the 750 to 900. Those things are only 70% utilized or knock it. I think they're getting like 12,000, there's a big gap in 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. Then people have to decide what they want to do. So, it's back in the rig speak, this is easier for me to explain conceptually because with PSV, it's like that [crosstalk]
With rig, people see all this math, and they get all excited about, "Oh, 12,000 foot depth, 8,000-foot depth. Oh my God." The average Deepwater 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 what 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. So, what you're going to see now is effectively not the Ford Taurus is, but I'll say, the BMWs are going to start really getting priced.
The other thing too, that's a little bit lost with Tidewater that's super exciting to me, and this also impacts Transocean more than other things, the drill ship has been the biggest evolution technologically offshore in the last probably 50 years. It used to be, if you're going on deep water, you're going to send me some [inaudible] which is just like steel poles, and it needs to be kept in place by multiple OSVs. You don't have any exact space, so you got PSVs, and you got anchor handling stuff and whatnot.
The drillship is basically a merge of a semi with like three different PSVs into one asset so you can dynamically position. It doesn't need anchor. How many you got more deck space and whatnot, right? What we are through drillship utilization effect like I don't know 90% of drill ships are now contracted. The semis are the lateness and effectively in offshore. So, Transocean as 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 for 450-500 a day. Where it also means for all these OSVs we are where we on utilization with max drillship utilization.
So, it used to be that you need 4 OSVs vs for every one Deepwater asset. With a drillship, it's not for the one. I don't know part of the number is like how far out you are because think about like a platform. PSV is a platform supply vessel. They have to 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. But with the semi submersibles, you need more PSVs.
We're in full utilization of the best PSVs in ATHS - oh God, I will screw that one out - ATHS is the anchor towing and handling, whatever. We're basically had full utilizations. Then the incremental is going to need more OSVs, which is going to just be this massive up move in rate for both. I think it's going to be up rate on the drill ship side as well. So, I think that's one, dynamic. It's a nerdy point, but I think it's a really big deal.
Andrew: This is basically saying the other side in a simplified and dumbed-down way, but we're there on the milk runs and the Brownfield expansions. If you start getting the big Greenfield expansion stuff, which I do think are coming based on I think Petrobras has, like, as you said, we're max utilization. We haven't really hit like, people are going wild drilling offshore. We're already basically at max utilization. Like things could things get pretty crazy from here.
Judd: Offshore, we are at 2010 levels of offshore CapEx, from 2010 to 2014 offshore global CapEx double. Like we're nowhere.
Andrew: Let's see. We have covered so much. We bounced around like crazy through a lot of stuff, but I just want to ask before you finish up. We've covered a lot, but anything you think people... anything you're getting asked questions about our people are talking to you that you think we should hit on the podcast before we kind of wrap it up?
Judd: No. I mean, there's always something. Everybody takes like a different angle. I think this is a lot. People forgot the asset quality, and what I call the snowball thing of that objects in motion, tend to stay in motion offshore. They're just so used to Shale, and these fractal companies that.. by the way, these fractal companies, it's basically, you're paying a fracture multiple for an offshore asset. That's another, super, by the way, to think about it. That's like a big one, people get out. 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. Yeah.
Andrew: Well, with all these debates we'll paying the capital gains, taxes, and heading to the beach.
Judd: Yeah. We didn't really talk about OPEC and Ukraine. I think the Ukraine thing is really interesting just because it's leading to energy nationalism. That is all like everything geo-politically that's happening the re-emergence of OPEC, 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 that talking about multi-year CapEx cycles, the OPEC put being there, we ever even touch 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's like the inverse of the FED. We lost the FED put; we've got the OPEC put.
Andrew: I hear you but the reason I didn't touch on it is A, because I'm not as comfortable with it, but I don't even think you needed it at this point, right? Like, you've already got the rates there. You've already got the rates there. 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. If you've got the put, you can [crosstalk]
Judd: You sort of touch on it too, to the last piece which is the stocks have around a ton, and people have a little bit of start issues. To that, I'm just like, dude, it's unbelievable how beat up these things were, and they were rightly beat up because it was written off. I agree with your point. I think it's a much easier trade now because he approved concept.
Andrew: When I first started talking to a lot of people about Tidewater, and the offshore, in general, all of them would be go, RSI. What is that relative strength index? They'd be like, "You can't. These are up 50% in 3 months. The RSI is trying to like..." I was like, "Yeah, but leading day rates went from 12,000 to 17,000 in those 3 months, and every day dollar day rate falls basically straight through to the bottom line. Like, it seems like you've hit the inflection point, and yeah, you're paying up more than you were 3 or 4 months ago, but we've seen the inflection point. Like, I'm paying for a little more. Certainly cool. Anyway, why don't we wrap it up there, guys? Again, I mean, Judd. The write up was so good. I'm going to include the link to the write up to the spaces in 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 him up with any questions here. Or, if you're a bigger fan than me to talk about all the other service you offer. But Judd, this has been so great. Thank you so much for coming on.
Judd: Thanks for having me.
Andrew: Looking forward to you coming on again.