Lighter Bristow Can Fly Higher And Faster

Value investors are known to look beyond the near-term issues of a business that offers long-term promise, which is why they should look at Bristow Group Inc. (NYSE: VTOL), a leading helicopter operator with significant exposure to the oil & gas industry.

Given the market’s love for anything but growth, the stock has limited Street coverage, even though the new post-merger combined Era-Bristow entity is not just one of the top helicopter operators but also one of the major service providers for out of favor oil & gas industry.

Yes, the environment for the business is tough right now, be it near-term issues like Covid-19 related slowdown or medium-term issues dislocation in the oil & gas industry causing shrinking flight hours and some customers terminating contracts.

But even with all those issues clouding the outlook, the stock offers good enough risk-reward tradeoff to warrant a closer look. Post-merger, the balance sheet is stable and the revenue source is more diversified, so the market will be judging the business based on restructuring efforts and the earnings power of the business on a normalized basis, discount it from whenever that happens. On all those counts, the name looks good.

This is the first time that Bristow was included in our weekly list of favorite ideas for the week.

The new Bristow – more diversified with less debt and decent profitability

Conditions in the broader oil and gas industry may be challenging, offering limited visibility but Bristow finally, post-merger, has a business model that can allow the company to generate positive cash flow regardless of the commodity price environment.

In an industry where most competitors are struggling, Bristow does have an opportunity to lead consolidation or go for a roll-up strategy, i.e. acquiring businesses and drive scale related synergies, to create value for the shareholders. Markets like the North Sea and Brazil seem perfect candidates for acquisition targets.

The benefits from the merger underestimated

Purnha’s Source: Bristow Group presentation

Earlier this year, Bristow and Era merged with Bristow shareholders owning 77% and Era shareholders the remaining 23% of the combined company. At the time of the merger, the management expected the combined company to generate revenue of $1.5 billion, adjusted EBITDA of $240 million, and another $35 million of annual cost synergies.

Despite the revenue getting negatively impacted by the Covid-19, the company seems to be moving ahead of its expectations for adjusted EBITDA and cost synergies.

The company has already identified synergies of at least $45 million, which may increase over the next few quarters as benefits from Bristow’s post-bankruptcy lease costs and other restructuring initiatives fructify.

Margin improvement

Operating leverage, the company’s ability to manage operating expenses tighter than the change in sales and an important barometer of the quality of management for a business with high fixed cost component, is getting evident.

Last quarter, revenues declined $12.9 million sequentially while operating expenses declined by $21.5 million over the same time period, even though general and administrative expenses increased by $7.2 million due to professional services fees and severance costs related to the merger.

It is safe to assume that profitability should get a significant boost as revenues stabilize and improve with the improvement in the oil & gas industry. Secondly, the company has 32 leased S-92A helicopters, the lease for which is expected to expire over the next 12-24 months. As the leases expire, the company can start returning those to the lessors, giving a further boost to the margins.  

Improving cash flows

With increased synergies identified so far of $45 million, the combined operation is already generating adjusted EBITDA of approximately $220 million, if we go by Pro-forma adjusted EBITDA for the 12 month period ending June 30, 2020, for Era and Bristow combined.

This adjusted EBITDA excludes special items and asset dispositions of $46 million for the first quarter of fiscal 2021 and the impact of foreign currency fluctuations of $8.4 million.

In the meantime, maintenance capital expenditure on spare parts, IT, ground support, etc. for Bristow was expected to be around $30-35 million for the year but the company spent less than $3 million for the quarter ended June 30th, 2020.

All in all, hard to doubt the company’s ability to generate free cash flow of $140 million, guided by the company earlier this year. If anything, this number may also be proven conservative.

And a stable balance sheet

At the end of last quarter, the company had $260 million of cash on hand and another $12 million or so remaining from the sale of 10 H225 helicopters was received after the closing of the books for the quarter. There are another three fixed-wing single-engine helicopters and two B-412 helicopters held for sale on the books.

With net debt of $400 million at the end of the quarter, the balance sheet is finally in shape to survive any type of pricing in the commodity markets. Indeed, with the kind of free cash flow that the combined business is generating, the company should be able to both pay down debt as well as acquire other struggling operations, leading consolidation in the industry.

Long-term

With the stock trading at an enterprise value of close to $1.3 billion, while generating $225-250 million of adjusted EBITDA, valuation is bound to be the biggest draw for investors, especially value investors.

As is typical of commodity markets, few are ready to see a comeback in the oil & gas markets, but one thing we can bet on is that the markets will remain cyclical, including oil & gas. Citigroup is already talking about $60 oil by 2021.

Early as it may be, but there are industry analysts talking about offshore wind farms is one of the major unexplored market opportunities for the helicopter providers that may develop over the next few years.

DISCLOSURE: Before writing a note, we usually ask (via Twitter and Stocktwits) for things readers would like us to cover in the note, please do share your views for our next note. This is purely an academic exercise for our internal use and we are NOT recommending buying or selling based on these projections.  

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