Bristow Group, Inc. (NYSE:BRS)
The 2013 Credit Suisse Energy Summit Conference Transcript
February 6, 2013 11:15 AM ET
Linda McNeill - Director, Investor Relations
Bill Chiles - President and CEO
Jonathan Baliff - Senior Vice President and CFO
Mark Duncan - Senior Vice President, Global Business Development
Brian Allman - Vice President and CAO
Leila McKinney - Investor Relations
Greg Lewis - Credit Suisse
Gregory Lewis - Credit Suisse
We are going to keep things moving along. Next up we have Bristow Group. One of the dominant helicopter aviation company servicing the offshore energy space. We have the whole team here. I saw Linda somewhere around here; Mark, Jonathan, and I’ve pleasure introducing Bill Chiles, the CEO.
Thank you very much, Greg. I’d like to introduce our team here, Jonathan Baliff on the middle right, our Senior Vice President and Chief Financial Officer; Mark Duncan, Senior Vice President, Global Business Development; and Brian Allman, where are you, Brian Allman, Vice President and Chief Accounting Officer; Linda McNeill; and Leila McKinney, who handle our Investor Relations.
So thank you for coming. Welcome here today. As you know we announced earnings yesterday. We’ll talk about that a little bit more in a minute. But it’s great to come here after a good quarter, because I know what it feels like to -- I want to see all the way around, it’s not fun. So we are telling each other, fine, great job, but let’s maintain humanity because next time you never know what might happen.
Lot of you already know the company well. Bristow is a global company and one of the important things about being a global company in our space, in helicopter space. It allows us to move helicopters around fairly seamless around the world when, for example, when Macondo happen, we moved our heavily helicopters in the Gulf of Mexico to the North Sea and West Africa. So we really didn’t miss the beat. And although, the results in the Gulf of Mexico were down, we all offset that by better results in the other parts of the world.
So helicopters do move around the world and it gives us a big advantage to have this global footprint, so we can move helicopters around the world. We are operating pretty in all of the major oil and gas basins around the world. So it is a global company and it’s unique, we are going to talk in a minute about what makes the company unique, but it is very unique company in a lot of ways.
We consider ourselves, some people get confused and put us in the kind of basket of companies in the Gulf of Mexico -- in the world in the transportation space like Tidewater some of the other boat companies.
We view the boat companies as really the longhaul truckers that are supporting primarily expiration and heavily development, mainly working around drilling rigs, mobile offshore drilling rigs.
Whereas, we are the yellow cab of the offshore oil and gas business, we are really hauling people. So it’s a much different business and we primarily focus on the production operations, so most of what we do comes out of CapEx, excuse me, out of operating expenditures rather than CapEx. So our results are not as volatile as you see in other parts of oil service.
Safety is, obviously, you can imagine, if we are not safe, we don’t fly. If we are not safe, we are not going to have many people who want to stay in line to get on our helicopters. When you get on to commercial airliners today, you don’t really think much about safety, if you have think about safety, you probably don’t, no one get on that airliner. So, if you – it -- we are just, we are no different.
If we don’t stress or strive for target zero and drive our performance as good as or better than commercial fix wing aviation, we are not going to be around very long. So we put a lot of emphasis on it. You heard me say before.
We won some recent industry awards. That’s great. But you can never rest on your laws. It’s a always -- it’s a process that just goes on and on and on and on, it’s underlining, and if you ever slowdown or stop pad yourself on the back too much something bad will happen.
So a global company like Bristow has very robust safety management systems and systems that really push changing our culture. We believe culture is the primary driver of safety performance.
Our investment thesis is based is, you look at this, this is a three leg stool. What -- the main point, number one on the bottom left there is that we really paid out of OpEx as I said a minute ago. We are not is dependent on commodity prices, if commodity prices go down, we obviously loose work on the margin, example was in ’08.
But when we -- when our marginal business which is really flying for expiration and development, early development fell off like, it still happen with the drillers and boat companies, but we have such a large base of flying for production operations that we are not nearly is affected as much as they are.
So that gives us a lot of stability. We are able to continue to grow in down markets as you, if you look back over our results in ’09, ’10 and ’11, very tough time for the industry, generally we were able to continue to grow and generally grow our earnings.
It’s also important to maintain our prudent balance sheet management. This is key to Bristow’s flexibility to take advantage of situations when we need to, for example this 225 situation, which I’m going to talk about in a minute. Our financial strength allows us to actually weather issues like that and also go out and buy, purchase 10 additional S-92s from Sikorsky to offset the potential issues that might come out of the suspension of flying of the 225s.
Also it’s important that we continue to give the shareholder a balance return through dividends and increasing stock price through growth of the company, better results. I’m going to talk little bit more about the dividend. We get a lot of questions from investors about what we plan to do in the future with dividend growth.
This slide really highlights what I said earlier, where our revenues really come from and you see about 60% of our revenue comes out of operating expenditures, which is production, and sure we are effected by downturn in commodity prices, people ask us all the time, what’s the big potential issue looming out there that we can’t see.
Well, in our view it’s commodity prices. If we can predict commodity prices we will have no problem, but it does affect us but much less than the drillers and boat companies and other people in oil service.
There are 8,000 production platforms around the world. It is interested to note that 1,700 helicopters fly in oil and gas world, in the global fleet of helicopters, military and civil helicopters about 45,000. So it’s not a large number of helicopters.
They fly for oil and gas. And when our aircraft retire, or when we decide to sell aircraft we generally sell them into supporting military operations and police work, and other things around the world. So there are other usages for helicopters, again, very important distinction between helicopters and boats and rigs.
So this is a very important point and I’ll make a point for those who don’t know the company very well. We don’t take fuel risk. So people think of us like an airline, we are really susceptible to fuel issue, fuel cost issues. But we are -- our customers pay us for the fuel, or excuse me, they pay us for any deviation from a baseline fuel rate. So we take no fuel risk.
Again, when you look at our kind of further dissect where our revenue comes from, a lot of people look at our flight hours, and they say, well, if you are not flying any flying hours you are not getting paid. That’s not true. A large proportion of our revenue comes from the fixed monthly charge.
Most areas around the world with exceptional to Gulf of Mexico we are paid a fixed monthly charge plus a flight hour rate. The fixed monthly charge generally covers our capital charge and all of the other fixed costs, the variable rate only covers the variable cost like maintenance, pilot, some of the pilot expenses and other variable costs.
So we really don’t -- in lot of cases, we are agnostic whether the helicopter flies or not, and in several cases, many cases where helicopters provided as a back up or search and rescue aircraft, they don’t fly, and we get paid.
So this gives you a good idea of where the revenue come from. Now, I’d mentioned the Gulf of Mexico, the Gulf of Mexico is a market in transition from flight hour driven market to more of the monthly standard charge driven market, that’s because we are seeing more heavies and mediums come into the market, it’s transitioning from shallow water business with lot of single engine helicopters where customers and clients fly couple hours a day to a market where they need these helicopters all day long to move large numbers of people out into deepwater. So it is a market transition. So this is the model we’ll move into just about around the world.
Our mission EC225, EC225 is a helicopter, the latest variant helicopter, latest variant of what you may have heard called the Super Puma. And the initial Super Puma’s will called 330s and 332s that were introduced in the mid to late 70s, and carried company’s like Bristow through the early part of the last decade.
The new 225 were introduced in 2004 and 2005. Bristow was the large customer for the 225. It’s the latest version of the Super Puma with all the new bells and whistles and safety components. So it is a very important aircraft. It is a heavy aircraft. It’s the main stay of the operation for all of the operators that are operating out of Aberdeen primarily in the North Sea, very important machine.
Late in May and October, there were two ditchings, control landings on the water, 225, one by bound and one by CHC, not involving Bristow Helicopters but because of the ditchings which were as result of a shaft failure in the gear box driving the oil pumps. So what the crew saw was lots of oil pressure.
The emergency loops us in terms of work properly so that calls for an immediate ditching. Because of this, these aircraft -- because of the regulators, we suspend those operations as of early November and we’re working with the aircraft and the other operators to find the root cause of these shaft failures so it doesn’t happen again.
We are fairly confident as we said on our call yesterday that we will be able to find a way to get back flying and do a safety case, a successful safety case to get us back flying by some time this summer, early or late summer. While your copter likely redesigns the shaft in the gear box.
So we’re not -- right now, we have 16 aircraft effective with Bristow. Most of our clients are continuing to pay. The monthly standing charge on the aircraft is down plus they’re paying the monthly standing charge for the aircraft come into support their operations. It is not in their best interest to not pay the standing charge on the aircraft is down because they need service. They are really understanding now what impact helicopters have on their operations.
Pretty amazing to see, we have some customers’ clients who say look we don’t care what it cost. We can’t shut in our production. We are looking at -- we're risking 50,000 to 100,000 barrels a day in the North Sea. We can’t shut it in. We got to get people offshore. So this may in the end remind them how important our service is for their business.
And the other important thing as I said earlier, our financial strength and our conservative balance sheet allows us the flexibility to not only handle the financial impact. So far, it’s really been minimal but if this thing goes on longer and longer, we could see some financial impact.
We have the ability to handle that. We also have the ability to repeatedly step out in order of 10 S-92s which is the Sikorsky equivalent to the EC225, in case this goes on longer than we expect. We believe there is plenty of demand out there. We’ll just see it in a minute for these additional 10 92s anyway. We likely would have ordered it.
So whether they actually are there reserved for the 225 as the suspension continues longer than we think or not, there are going to be plenty of places for these new aircraft to go to work. And this highlights that. You see where the activity is around the world, there are 474 opportunities. This is the largest opportunity that we’ve seen since ‘07.
So we’re really back to the point in the business where demand is drastically outstripping supply, exacerbated by the 225 problem particularly in the heavies. The large green bars -- the green bar show the heavy demand around the world. These are actual opportunities that we identify in the markets within which we operate.
And you can see the hotspots, North America, Europe and Australia. We’ll point out in Europe the 101 heavies includes 22 aircraft that opportunities for 22 aircraft for the U.K. SAR contract that we’re bidding on -- that we’ve already bid on, excuse me, that we’re in the running for.
When you distill this down, the demand down, you see that out of 474, there is demand for 430 new helicopters, 288 that we believe were realistic bids. So we cannot risk weight the 300 out of 430. We get that under 288. We look at our hit rate of about 33% and that gives us about 82 very high probability targets and then at the very bottom, you see what our ordered option book looks like which is just about right to cover.
We like to keep our order book and option book layered in a way with deliveries laid out in a way what matches up pretty much with these opportunities. And these opportunities are over the next five years. So very robust demand, very good market conditions.
We have the strongest balance sheet in the business with those units filed with helicopter world in north, any other public comps out there, all the PHIs, public -- they don’t trade like a public company because the shares, the budding share is controlled by one shareholder.
ERA is just -- and there are others out there but if you look at the -- if you can get their financials, you look at their financials, they are primarily -- they are highly levered depending on leasing for most of the capital. CHC for example has leverage up to 80%, a little above double, 80% debt to cap. So our strong balance sheet again allows us the flexibility to do a lot in growing the company, paying the balance return, doing the things I already talked about earlier.
We’ve got a lot of liquidity. We closed the year -- we closed the quarter, excuse me, the third quarter, December 31st with $430 million liquidity and then if you look at -- if you look at our operating cash flow, how we’re generating cash flow, you see the significant change. When you looking at ‘13, we’re almost -- at this point, we’re almost where we were at the end of last fiscal year.
So we’re generating a lot of free cash flow, a lot of operating cash flow excuse me. And this comes from a discipline in our operations, the hard work that Mark does. It’s just – it’s been great for us. Through our BVA initiative, which is an EVA model, we believe we squeezed out of the balance sheet about $250 million of additional liquidity over the last couple of years.
So very strong cash flow generation. So our liquidity position now is as I said $431 million. That’s a little higher than we normally maintain. We’re doing that because of the U.K. SAR possibility and the capital expenditures that may require for a successful bidder on that contract.
This is a chart that shows you what our book value per share is and if you’re color blind, the lower line that ends at $44.06 is our book value per share. And then you look at where we trade and actually right now, we’re trading at about $58.50.
So we’re above our net asset value per share and the way net asset value is based on the fair market value of the assets and one of the things that is good about this business is well, we do have a blue book, you can go to heavy values and you can actually see the value, current value of every helicopter type in the world of any age. So that gives us the ability to quickly go and assess our net asset value.
So we’re trading about our net asset value now because positive BVA are improving and better return on equity we’re seeing historically over the last three four years. We believe this will continue.
We have -- we are committed to balance return to the shareholders. We know our dividends are important since we’ve initiated dividend in our fiscal ‘12. Our stock price has performed better and we’ve attracted a different shareholder group as you can expect.
We are telling people to model long-term 10% to 15% dividend growth. We actually grew the dividend 33% between fiscal ‘12 and ‘13. We don’t expect to continue to grow at 33% rate but for the next three years, we do expect to grow at above that 10% to 15% range that we’ve given you before.
So -- and we also have a share repurchase plan in place and whatever -- you go back to the chart, I showed you a minute ago, we trade significantly below that net asset value. We effectively can buy aircraft back cheaper than we pay Sikorsky aircraft to perform and we’ll do that.
So that’s important part of the plan as well. You may have heard yesterday, we increased our guidance range from $3.60 -- $3.85 to, excuse me, to $3.60 to $3.85 from $3.25 to $3.55 that shows our confidence, obviously it includes the results. So we announced yesterday $1.17 a share plus what our expectation is for the fourth quarter.
We are -- how people modeled the business through use of the number of LACE aircraft, large aircraft equivalent. The formula really works this way, large aircraft as large aircraft, a medium aircraft, two mediums equal one large; four small aircraft equal one large. So we take our fleet, we come up with a number of LACE aircraft and then we give you a LACE rate. And we give you that LACE rate by area of the world and two things affect the LACE rate. Obviously the number of aircraft but also the rate we are getting from monthly standing charge plus the flight hour charge and utilizations.
So as soon as you have a much easier way to model the company and then obviously, we’ll give you all the other metrics. And in the appendix of the booklet you have, you will see a lot of additional information, more granular information on how to use the LACE rate, how to use the metrics to model the company.
So before I get to Q&A to the questions, I just want to emphasize that we are happy about our results. Obviously, we are in an extremely robust market. We have not seen major impact from the 225 suspension of operations and so the future bodes well for Bristow. Safety obviously continues to be our number one core value, will be our number one core value and our main focus.
We want to continue to provide you with a balance return through growth in the share price and our dividends and share buybacks. So with that, I’m going to stop and open the floor for questions.
Greg Lewis - Credit Suisse
Great. Thank you. I guess the first question I would have is clearly you’ve acquired a company called Cougar late last year. I’m just thinking about that. Could you provide an update on that and then maybe put some other potential opportunities that exist sort of maybe on the consolidation front in the aviation space?
Okay. I’ll start off and then I’m going to turn it over to Mark and Jonathan. We closed the acquisition of Cougar of the assets of Cougar Helicopters in early October. So we saw almost a full quarter of results from Cougar. The way the acquisition works, we acquired all the assets and all the aircraft, eight S-92s that Cougar operates on the eastern coast -- Northeast Coast of Canada, in Halifax and St. John's, Newfoundland, Halifax, Nova Scotia.
Most of our cash flow comes out through the leases of the equipment of the helicopters and the maintenance contract that we have with Cougar. So it’s different than Lider where we get our most of our results coming out through equity and earnings and clearly there are some leases of aircraft in Lider in Brazil. But in this case, the bulk of our cash flow and return on it comes out through leasing the aircraft.
We do own 40% economic interest in Cougar Helicopters. So there will be some equity and earnings, but they will be very minor and we have a 25% volume position in the company. So to get to the second part of your question, what’s the outlook? I’ll let Mark Duncan talk about that.
Yeah. We made an arrangement with Cougar to cover Greenland as well as Eastern Canada. And there are growth opportunities in markets and that are already projects that we know are coming like Hebron from Exxon Mobil, which has been announced just going forward.
Also Shell and BP have made some significant acreage acquisitions and are going to go into seismic mood this year or next year of Nova Scotia, though it is expected back in the Greenland as well. And we see Cougar being very well positioned to access those opportunities.
And I will say that another important point here is that we have been able to move aircraft. I talked about moving aircraft around seamlessly. We actually have moved aircraft around between Bristow and North Sea and Cougar in Canada.
Statoil approached us at a point where they had excess capacity in Norway and so we would like to move one of our S-92s to Northern part of the market area that Cougar serves and let them fly for, what, six months, Mark?
And then we’ll move it back and that worked perfectly. In addition, we moved -- we had Cougar aircraft operated flying out of Aberdeen for about six months. And when the 225s went down early November, we kept it over about three weeks to try to continue to cover. So we are able to move aircraft around at fairly fungible. Thanks, Greg.
From a financial standpoint, what we tell the market is we expect to put another large helicopter every 12 to 18 months into Cougar fleet. So that’s generally how we’ve been talking about how all of this translates into growth. And if you look at financials for Cougar, even though we don’t disclose them specifically but if you look at North America in the quarter, the way that Cougar runs it’s very similar to the European operations with their margins and LACE rates.
Greg Lewis - Credit Suisse
I guess another question I think a lot of people often wonder about -- just given that there are two major suppliers of heavy helicopters, Sikorsky and Eurocopter. As we think about supply, clearly you laid out a pretty robust demand outlook for the next couple of years. So, how should we think about supply and meeting that demand? Is there excess supply?
I mean I think there is lot of concerns about maybe some reductions in military spending and maybe some toughest types of helicopters maybe being targeted into the oil and gas space. So if you can just provide some maybe color on that I think that would be very helpful?
Sure. This is a very valid question. So, I’ll let Mark start-off talking about, primarily this is focused on Sikorsky and Eurocopter.
As we look at the market without considering any prolong suspension of 225s, the market was tightening. The demand was higher than the supply in certain key markets. Examples would be Brazil, the North Sea to an extent in Canada itself. So there was some very robust demand and limited supply and the supply that was there was already largely sold. So there wasn’t much capacity to do more.
With the 225 situation in place, with the 225 not coming into the market the spare capacity in the Sikorsky system has been acquired by ourselves as mentioned in the slides here and that further exacerbates the supply-demand situation. So, I think that’s very positive from our perspective.
In terms of -- and we may talk about I think, Greg, just focused on -- if we can actually ramp up, substantially ramp up production of S-92s or S-76D models. As the military spending on the Black Hawks come down and can Eurocopter do the same long-term.
We do see the ability to change that overnight. So the military helicopters are not suitable for offshore flight. The specifications are completely different. But it doesn’t mean we can’t change the production line but that takes time and also there were constraint on forward buying the CDOs et cetera that’s required. So we don’t see the ability of these companies to start building twice as many heavies for the offshore business within a two or three year period. So we are fairly confident that supply-demand is going to stay tight.
Jonathan, do you have any?
No. I just think that if you go the production lines, especially Eurocopter there needs to be a significant retooling. It’s not just about trying to add along, which is of course a gain. There would need to be a complete remodification of the production process, which the reason I say, mine is two years. It could be even longer than that just given the nature of our supply tightening.
Greg Lewis - Credit Suisse
Great. And then just one more from me. And thinking about the Lider JV and just clearly there has been all we’ve been hearing it now and it’s been out in the market for a quite sometime. Operational issues in Brazil, the ability for companies to make money operating servicing the offshore oil and gas space in Brazil. If you could just provide some sort of update on the Lider JV I think that would be helpful as well.
Let me start off and I’m going to let these guys finish. We just got about a minute. The way we operate in Brazil is entirely different than the way of drilling company and rig company will operate there. Drilling, we spend 32 years as drilling contractor. It’s very difficult to take your particular big, $600 million floater and turn it over to your joint venture partner in Brazil and operate through a JV.
It’s quite a bit different. In our case, we are actually operating real Brazilian company that has been playing there for many years. The largest civil aviation company in Brazil and they have been flying helicopters for Petrobras for a long time. So what we do is we come in, buy a part of their company, provide capital, additional aircraft and our book to support their operations.
So with that, I don’t know if you guys may want to…
The specifics of whether we -- we’ve seen the company grew. It’s EBITDAR by about 50% since the acquisition and that -- Lider has two halfs to the company. Half of it’s offshore and helicopters and the other half is general corporate aviation. The corporate aviation business got hammered by the recession and despite that they’ve grown the EBITDAR by 50%.
There are some translational issues and that are coming from Brazil into U.S. GAAP accounting that talk about value creation. In terms of the helicopter side of Lider, Petrobras is bringing so many rigs and so many production platforms in place. The helicopters aren’t catching up because the new fields are further offshore. The predominant supply in Brazil until this time has been medium aircraft. The new requirements are all for heavies.
Although some of the projects are delaying, they are not going away and the helicopter side is still trying to catch up with that demand. Lider added five heavy helicopters in the last year. The way Petrobras contract work, you don’t get paid until you start flying and there is a lot of preparations.
So the first half of Lider’s results last year were held back by the cost ramp up but neither the aircraft are in place. There is one more to go in place in this quarter and there is a huge increase in the EBITDAR production as we drive into the second half of the year. And that is expected to continue. There is no -- today there is no more additional acquisitions coming, so they maybe in a steady state mode.
Greg Lewis - Credit Suisse
Okay. Perfect. Thank you for the time gentlemen.
Thank you very much.
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