Bristow Group: Cheap And Well-Managed

Summary

• Bristow Group is a well-managed company generating positive free cash flow in a hard-hit industry.
• It trades at a discount to both book value and net asset value.
• It is likely that we will see further industry consolidation and improving profitability.

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Synopsis

SCIRE Investments believes that Bristow Group, Inc (NYSE:VTOL) is a well-managed company with a strong capital allocation focus trading at a significant discount to value. They are in a tough industry, but expect that going forward they will have more tailwinds than headwinds. There are several factors that should benefit them, such as consolidation and higher oil prices.

About Bristow Group

Bristow Group is primarily a helicopter services company. They provide vertical flight and aviation services to oil and gas companies, public and private search and rescue - SAR services, fixed wing transportation and ad hoc services. Most of the oil and gas exposure is offshore energy and they have public sector SAR service for the U.K. and commercial SAR services in several countries. They have a diversified customer base with customers in Australia, Brazil, Canada, Chile, Colombia, Guyana, India, Mexico, Nigeria, Norway, Spain, Suriname, Trinidad, the U.K. and the U.S. As of 12/31/20 pro forma revenue breakdown by region and aircraft is as follows:

Source: Q3 2021 Earnings Presentation

The Merger & Industry Consolidation

Due to low oil and natural gas prices over the last few years helicopter services companies have been hit hard. Many of the offshore oil services companies have gone bankrupt. In fact, Bristow went bankrupt. However, this company is not really Bristow or not entirely at least. One of the companies in this industry that did NOT go bankrupt was Era Group. In January 2020 Era Group merged with Bristow Group to form the current company. While Bristow was the larger of the two, Era was the legal acquirer, is the parent company, and the CEO as well as many of the top executives are from Era. However, on an accounting basis Bristow was considered the acquirer and the merged company changed its name to Bristow with the new ticker of VTOL. The merger provides increased scale, took out a large competitor, and is expected to generate significant savings. With the merger, Era expected about $35 million in synergies originally but has since increased that to $50 million with 80% of the total synergy captured within one year of the merger.

Source: Q3 2021 Earnings Presentation

While this merger has helped consolidate the industry, it is expected that there will be further consolidation and VTOL might be at the center of it. As the CEO of Bristow mentioned on the Q3 2021 Call:

we continue to believe that the industry needs and would benefit from additional consolidation. A lot of the rationale that underpin the logic of the Bristow-Era merger would apply in other combinations in different parts of the world where there is an excess amount of capacity, too much equipment, too many operators, and we believe the market would benefit from consolidation . . . if there's another transaction that has some of the similar benefits of consolidating a market, creating value from synergies by eliminating overlapping costs, we would be interested in that. But any potential M&A opportunity would need to fit within our financial parameters as well and our strategic priorities of maintaining a strong balance sheet and positive free cash flow profile.

Issues Facing the Industry

As previously mentioned, the price decline in oil and natural gas has hit the industry hard and many players have gone bankrupt. The CEO of VTOL mentioned there was too much capacity still and that the industry would benefit from consolidation. It is likely that offshore oil & gas will take longer to gain momentum if prices continue to rise, so help may be further away than other oil & gas related companies. Despite these issues since the merger VTOL has been able to generate positive free cash flow and on the latest call they mentioned that they expect to "generate a substantial amount of cash flow this year regardless.” They have also been able to generate cash flow through the sale of helicopters. It helps that their business isn’t entirely oil and gas related and that some of the oil and gas business is more stable. The government service contracts are more stable for example and 80% of their oil and gas business is weighted to production support. There are also concerns about the U.S. lease moratorium put in place by the Biden Administration. However, this may not impact VTOL as much as some may think. First they are, “currently servicing just 3 drilling rigs in the U.S. Gulf of Mexico . . . the rest of our helicopter fleet in the U.S. Gulf of Mexico is supporting production work.” Also, as they explain below, there are differences between a lease and a permit:

So the difference between a lease and a permit is that a lease is the right to that plot of water and the seabed underneath it. Those are awarded in auctions that take place periodically over time. A permit would be specific to a well, and activity that the oil and gas company is performing on the lease that the company has the rights to. So the permits that have been issued and again 22 of them since President Biden took office have been issued, those are for existing leases. So effectively what the current suspension does is pause the issuance of new leases or rights to work on new plots of water and the underlying seabed.

So, while the moratorium will have an impact, especially further out in the future, the impact is less in the short-term and maybe less detrimental than some may think. There is plenty of time for the policy to be changed before it has a real impact on VTOL.

Finally, EVs have the potential to disrupt their business as they will reduce oil demand. However, EVs also provide an opportunity. There will need to be more energy produced from wind and natural gas to provide electricity. The need for offshore natural gas may increase, and offshore wind is already increasing in importance. On the last call an analyst referred to a recent Air & Sea Analytics call where it was mentioned that the wind industry will need over 100 aircraft over the next ten years. The CEO of Bristow responded:

the new wind farms that are scheduled to be developed are going to require offshore helicopter support. We think Bristow is very well positioned for that,. . . In Europe, post merger, this is going to be a strategic priority for Bristow.

Bristow is the world's largest operator of AW139 helicopters which can be used in the development and construction phase for offshore wind. However, as offshore wind transitions to operations and maintenance they will need to purchase either H145 or AW 169 helicopters to be competitive. But they believe the returns look attractive, so if they win contracts it is likely they will increase their capex to add those aircraft.

The move to EVs and renewables has both risks and opportunities that VTOL will have to navigate as that transition occurs. There are other opportunities that may help going forward as well. For example, Guyana and Suriname "will be perhaps the highest growth rate offshore oil and gas region that we see.” Bristow will benefit from this as they are the sole operator of offshore helicopter support to oil and gas companies in those countries. Also, while they expect 2021 to remain challenging they believe starting in 2022 that spending will increase and that there will need to be another spending cycle due to the underinvestment in the oil and gas industry. Deepwater is likely to see some benefits from this.

Debt & Refinancing

As you can see below, the company had some higher cost fixed and variable rate debt that was coming due in the next couple years.

Source: Q3 2021 Earnings Presentation

On the call the company mentioned refinancing the debt and they have already done so. They issued $400 million of 6.875% senior secured notes that mature in 2028. With this debt along with cash they paid off $132 million of the 7.75% notes due in 2022, $204 million in PK Air Debt at Libor + 500 bps, and $152 million of Macquarie debt charging Libor + 535 bps. This reduced debt by $88 million, fixed some of their floating rate debt which will reduce the interest rate risk, and extends the maturity date. In the past they have paid off debt in the open market as well.

Capital Allocation

While some might not be too happy with Charles Fabrikant at the moment as he looks to sell Seacor Holdings (CKH) he does have a history of good capital allocation. It’s not perfect, but overall, it’s still a good track record especially considering the nature of the industries he’s been involved in. The reason I bring this up is that Era Group was a spinoff of Seacor. Charles Fabrikant was a board member of Era Group and is still on the board of VTOL. According to Bloomberg he owns over 233,000 shares which is about 0.8% of the company. The CEO of VTOL, Chris Bradshaw, was the CEO of Era Group and appears to have a similar mindset to capital allocation as Mr. Fabrikant. Some recent examples of his capital allocation pedigree include buying $12 million of the 7.75% Senior notes in the open market at a price of 97.5%. They would have probably bought more but the bonds are very thinly traded. Also, during the last quarter the company purchases almost 103,000 shares at an average price of $23.49 which is substantially below the book value per share and the net asset value of the company. The previous quarter they purchased over 345,000 shares at an even better price of $21.93 per share. Since September they have completed $10 million of their $75 million share repurchase program. Last quarter alone spent $40 million, in aggregate, to repurchase shares and pay off debt. Similar to the Fabrikant playbook Bristow, and Era before that, was not afraid to buy or sell helicopters to generate additional value and/or cash flow.

While it is still too early to judge the full merits of the merger with Bristow, I believe that this was a great capital allocation decision that benefitted the Era Group shareholders immensely. In my opinion, Era Group shareholders extracted more from the merger. As mentioned earlier they now expect at least $50 million in synergies and have already completed $27 million. However, they are not perfect either. They will make investments in JVs and other companies, but this past quarter they recognized a $52 million impairment loss in their Cougar Helicopters investment.

In regard to their mindset about capital allocation going forward in the Q3 2021 call they mentioned that:

priority 1A should be protecting the balance sheet. We also believe that we'll have opportunities to return capital to shareholders on an opportunistic basis and then beyond that we do believe that for M&A having a strong balance sheet for some of the consolidation opportunities.

They do not expect much for capex for the foreseeable future unless they win some new search and rescue contracts or as mentioned before some wind contracts. Specifically to M&A they stated:

if there's another transaction that has some of the similar benefits of consolidating a market, creating value from synergies by eliminating overlapping costs, we would be interested in that. But any potential M&A opportunity would need to fit within our financial parameters as well and our strategic priorities of maintaining a strong balance sheet and positive free cash flow profile.

Valuation

Unlike some energy assets helicopters have many uses. They can be used for hospitals, search and rescue, media, surveying, sightseeing, tourism, travel for the wealthy, travel to hard-to-reach areas, etc. While there can still be overcapacity they should not drop in value as much as more specialized oil & gas related assets do. This is why I will be using an asset-based framework to value the company. Below are the numbers that the company provided for its book value per share (BVPS) and Net Asset Value (NAV) as of 12/31/20 and 01/28/21. The big difference between the BVPS and NAV is the fair market value of the owned aircraft. The company believes that they are on the books for a much lower value than what they can sell them for in the open market.

Source: Q3 2021 Earnings Presentation

Currently, they are not earning the desired return on assets, but I expect the industry to reduce overcapacity and return to higher profitability over time. As of 03/02/21 VTOL had a price per share of $26.39 or a discount to book value of about 17% using the 01/28/21 numbers. Another way to think about it is if VTOL is able to generate a 12% return on equity over a full cycle, then they should trade for about 1.2x BVPS or close to $38. Remember they have been buying back shares at less than BVPS which should help them generate this higher return. This would suggest a discount of about 31%. This is still not comparable to the 57% discount based off of NAV. While the range of discounts is wide, from 17% to 57%, either way you look at it the company appears undervalued based on its assets.

Conclusion

While the industry has struggled over the last several years and there are some future risks, SCIRE believes that VTOL has several factors that are likely to benefit them going forward. They have been very well managed and survived the downturn when many of their peers did not. They are already generating positive FCF and expect that to increase into the future. Now is the time to buy when the company is trading at a discount to value and there is a margin of safety built in.

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