Era Group: A Fortress Balance Sheet, Superb Management, And Strong, Growing FCF With 100%+ Upside

Summary

• ERA Group has positive free cash flow and a superb balance sheet, the latter a source of strength and not a liability to be overcome.
• The company has the best fleet in the industry – 100% owned/no leases. The fleet has been trimmed recently to focus on the tightening market for AW139s.
• ERA, with the best management team and an attractive valuation (FCF yield of 12%; 60% discount to BV), is leveraged to an offshore recovery that appears to be underway.
• Shareholders will benefit as the company is run by superior capital allocators who can take advantage of optionality to either pursue highly accretive M&A or grow BVPS through share repurchases.
• Investors are likely to earn 100% even without an offshore recovery,while M&A or an industry recovery will generate 300%-400%returns, but the downside is likely only a 10-15% decline.

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ERA Group is the fourth-largest operator of helicopters servicing offshore markets. The company owns a total of 105 helicopters, which are used primarily for transporting workers to offshore oil and gas (“O&G”) installations. However, they also engage in search and rescue work and lease helicopters to smaller operators. The U.S. Gulf of Mexico is the company’s most important region, but ERA also has smaller operations in Brazil and Suriname, while its third-party lessees are in various other countries. As is well known, the offshore O&G space is highly distressed. The helicopter industry has not been spared and there is significant oversupply of certain types of aircraft. The three largest companies in the industry and a major O&G helicopter lessor (i.e., CHC, Bristow, PHI, and Waypoint) have all gone through bankruptcy, along with many other companies in the offshore oil patch.

While its competitors have been busy driving themselves into bankruptcy (largely due to poor balance sheet management with a healthy dose of incompetent leadership), ERA has only gotten stronger during the last five years, dramatically reducing its net debt and other financial obligations, while positioning its fleet to benefit maximally from any recovery. The company accomplished this feat, largely thanks to the efforts of its CEO, Chris Bradshaw, despite this period witnessing the worst ever market conditions in the offshore helicopter space.

Mr. Bradshaw inherited his job in November 2014, just as the oil bust was beginning. The offshore O&G industry quickly became massively oversupplied with helicopters, many of ERA’s aircraft were idled, and those still under

Analyst’s Disclosure: I am/we are long ERA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.