Describe the investment thesis for another of your favorite energy-related holdings, Bristow Group [BRS].
CJ: One of our primary sources of ideas is to look along different parts of an industry’s food chain to see who’s doing what and where value is being created. We came across Bristow while looking at energy service companies at a time when energy was out-of-favor and Bristow itself was going through some changes that made it even more out-of-favor.
The company is one of the largest global providers of helicopter and related aviation services to the offshore oil and gas industry. It’s a high barrier-to-entry business, primarily because you need a large fleet of specially equipped helicopters – Bristow now has more than 500 – and there’s a shortage of supply that results in lead times of two to three years for delivery of these types of helicopters.
Another thing we discovered in looking more closely at the company is that it tended to operate with longer-term customer contracts – with the ability to pass through, at least on a lagged basis, surcharges for fuel and other expense increases – and that its revenues were more closely tied to more stable energycompany production budgets rather than exploration budgets. So both the nature of the business and the way Bristow approaches it smoothes out somewhat the sharp swings in volume and rates that you see in other energy services businesses.
We also discovered that there is a very real blue-book value, if you will, for used helicopters. You can assign values to their fleet based on what is a reasonably deep and liquid market for used helicopters, which have a variety of applications in areas like tourism, law enforcement and emergency medical services. That provides a reference asset value that we like to see in judging downside protection.
The company has been expanding its fleet as the energy market has tumbled. Is that cause for concern?
CJ: It has been in growth mode, primarily to take advantage of international growth opportunities, and is probably halfway through the upgrade program to both expand and upgrade its fleet. Our feeling is that management is very sensitive to returns on capital and won’t be buying beyond what it believes it needs to handle actual customer contracts. This will obviously be tested over the next couple of years, but we expect earnings power to grow with the higher volumes and improved day rates and contract terms the upgraded fleet should allow.
On top of that, our longer-term view on energy is that there is an inexorable trend toward the need for expanding exploration and production efforts, particularly in international markets, and particularly in the harder-to-access offshore areas that Bristow serves.
With the shares at a recent $24.60, how are you looking at valuation?
CJ: At the current price, the company’s enterprise value to trailing EBITDA is around 5.5x. In comparison, the other big competitor in the business, CHC Helicopter, was taken private earlier this year at about 10x trailing EV/EBITDA by an energy-focused private equity firm we hold in high regard called First Reserve.
At the same time, we calculate the blue-book value of Bristow’s helicopter fleet at roughly twice the current share price. As confirmation of this unrecognized asset value, the company recently sold some aircraft to a Gulf of Mexico operator at a significant premium to GAAP book value, which will result in a gain of roughly 75 cents per share.
Even considering the terrible sentiment around oil and gas, we just think the punishment meted out to Bristow’s shares has been unjustified and overlooks the relative stability of its business, its underlying asset values and what we believe are bright longer-term growth prospects.