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Amit Amin

vamsi krishna

BRS AT A GLANCE

P/E ► 7.19 AVG EV/EBITDA ► 7.10 AVG ROA ► 6.1% AVG ROE ► 9% AVG Debt to Equity ► 0.910 AVG Current Ratio ► 3.11 HIGH Interest Coverage Ratio ► 6.14 AVG

 

 

 

 

 

 

Bristow Group (NYSE: BRS) operates the largest fleet of commercial helicopters in the world.^[1] As of 2008, 99% of Bristow’s business came from the offshore oil and gas industry. ^[2] Higher oil prices encourage greater investments in offshore wells, and raises utilization rates of existing rigs; these rigs in turn need helicopter transportation to move crews and gear to and from offshore locations.^[3] This same trend, however, is also working against Bristow. Most new wells are in deepwater reserves, up to 200 miles from land. To travel that distance, medium and large helicopters are needed; they have greater fuel capacity than small helicopters.^[4] Consequently, Bristow’s large fleet of small helicopters is losing value. As such, Bristow is in the process of an expensive plan to shrink its small helicopter fleet while expanding its medium and large fleets. That said, there is still uncertainty as to future demand for large helicopters in some of Bristow’s key operating areas. In Nigeria, for example, militant groups have attacked a deepwater oil platform. The attack didn’t drastically affect the area's oil production, but it has stifled future investment in an area chock full of potential helicopter transportation contracts.

Business & Financials

Bristow Group’s revenue and net income have grown steadily, up 21% and 40% respectively from FY2007 to FY2008. Although its business is tied to production related support services rather than to more cyclical exploration and rig activity, the booming oil and gas industry is facing a growing shortage of medium and large helicopters. Higher margins and new capital from stock and convertible note sales in June of 2008 have let expenditures on new aircraft rise to a new high, so that some of the shortage can be filled by Bristow's helicopters.^[5] Bristow Group's fiscal year ends March 31.

Bristow operates five main geographic units:

Source: ^[7]

• North America (23% of revenues in FY2008): Bristow is one of the two largest suppliers of helicopter services in the Gulf of Mexico. 121 small helicopters are used there to provide services for shallow water platforms, and 30 for deepwater platforms. The sale of 17 small aircraft caused revenues to fall $2.3 million from 2007 to 2008. As part of its growth strategy focusing on deepwater facility transportation contracts, the unit plans to sell 50 more small helicopters.^[8][9]

• South and Central America (6%): This unit operates 33 aircraft, of which 28 are medium sized helicopters. Through its joint ventures, Bristow is the largest helicopter provider in both Mexico and Trinidad. Operating income has stagnated from 2007 to 2008, but more than doubled from 2006 to 2007. Operating income rose as it did because fleet additions increased revenues, but low usage of the unit’s helicopters under contracts limited expense growth to 2%.^[10][11]

• Europe (37%): This unit is the second largest provider of helicopter services in the North Sea, where Bristow has devoted 38 large helicopters. The gross revenues of this unit increased $63.8 million in 2007 to $361 million in 2008. This increase was caused by the addition of new aircraft to the unit. With demand for helicopters outpacing supply growth, contracts for these new aircraft were made at higher margins, letting the unit’s operating income increase 48% as well.^[12][13]

• West Africa (17%): This unit is the largest helicopter provider in Nigeria, offering 12 small, 28 medium, and 3 large helicopters. The addition of new aircraft in 2007 contributed to revenue growth of 30% into 2008. Contract renegotiation at higher margins coupled with higher revenues led to income growth of 72% in 2007. Growth prospects in this region are high, with large reserves of untapped deepwater oil.^[14][15] Unfortunately, this area is also full of political instability and militants determined to attack foreign oil and gas companies.

• Southeast Asia (11%): With 7 medium and 13 large helicopters, this unit is the largest helicopter provider to the oil and gas industry in Australia. This unit also operates 4 medium helicopters in Malaysia, which were purchased in 2008. As with Europe and West Africa, the addition of new aircraft combined with higher rates led to a 52% increase in revenues and 76% increase in operating income in 2007.^[16][17]

• Other International & Flight School (5% & 1%): Bristow also has operations in small markets like Egypt and Ireland, providing the unit 11 medium and 9 large helicopters, as well as 2 fixed wing aircraft. An increase in flight activity and labor costs pushed expenses for this segment above revenues in 2008. Operating margins declined from 20.2% in 2007 to -.6% in 2008. Bristow Academy was acquired in April of 2007, and trains helicopter pilots and maintenance personal. Although it provides just 1% of the company's overall revenues, it gives the company access to skilled pilots; about a quarter of 2008 graduates were picked up by Bristow's other units. Furthermore, through the Academy Bristow provides continuing education to its own pilots and maintenance personal.^[18][19]

Trends & Forces

Deepwater Facilities Require Big Aircraft

Source: ^[20]

As oil prices continue to rise and shallow water production dries up, deepwater drilling is becoming more common. From 2003 to 2008 deepwater oil production in the Gulf of Mexico has almost increased by 50%.^[21] Deepwater oil production in Africa has more than doubled during that same time period.^[22] Deepwater facilities can be up to 200 miles offshore, requiring helicopters with greater fuel capacities.^[23] In anticipation of greater demand, Bristow has been expanding its fleet, with orders for 9 medium and 16 large helicopters, and options to buy another 50 aircraft. Aircraft capital expenditures have tripled from 2005 to 2008. ^[24]

Regional Instability Limits Growth Prospects

As an oil and gas services support company with international operations, political instability affects Bristow’s business. Bristow's contracts are two-tiered. So, for example, customers in Nigeria pay Bristow a flat fee for the right to use a certain number of its helicopters for a certain period of time. Then, each time one of these customers requires the use of one of its contracted helicopters, it must pay Bristow a usage fee. If one this customer's offshore well's is attacked, usage of Bristow’s services will go up in order to transport repair crews and new equipment. This happened when Hurricanes Katrina and Rita struck over struck 75% of the oil and gas platforms in the Gulf Coast, although they weren’t the result of a human attack.^[25]

However, the situation has not been so favorable in Nigeria, where 17% of Bristow's revenues are earned.^[26] A militant rebel group has been targeting the oil and gas industry, intent on the expulsion of foreign oil and gas companies. Key customer Shell experienced an attack on a far offshore rig in June 2008. Shell has shut down production at that rig, bringing down oil production by 200,000 barrels per day.^[27] Although usage of Bristow's helicopters has increased in order to transport repair supplies, that isn't what's important. 1.25 million barrels of new offshore production has been planned for by Nigeria over the next 6 years.^[28] This attack has put that number into question. If the militants succeed, Bristow will lose more than just potential contracts, it will lose all of its current business in Nigeria - that's $171 million in revenues in 2008.^[29]

Oil and Gas Prices Affect Demand for Bristow’s Services

Higher oil prices encourage greater investments in offshore wells as upstream petroleum companies try to increase production to take advantage of the price environment. For example, over the past five years, oil prices have risen six-fold.^[30] In response, in the Gulf of Mexico, where Bristow earns about a fifth of its revenues, jackup and semisubmersible rig utilization rates have risen over 30%.^[31][32] This creates new opportunities for Bristow, as these rigs need dedicated crews that need to be transported to and from offshore locations. Higher oil prices also raise Bristow's fuel expenses, but are protected against with annual price increases.^[33]

Competition

In the aviation industry, competitive bidding ensures that price is the primary basis of competition.

• Seacor Holdings (CKH) - Seacor's fleet competes with Bristow in many places around the world. However, its main business is offshore marine services.
• CHC Helicopter (FLI) – CHC is the second largest commercial helicopter operator in the world, but has more medium and large helicopters than Bristow Group. As a result, CHC is better positioned to grab contracts for deepwater platforms, which require medium and large helicopters.
• Rotorcraft Leasing Company LLC – Rotorcraft is the largest privately-held operator in the Gulf of Mexico. It’s medium and large helicopter fleets are significantly smaller than that of its competitors.
  
• PHI (PHII) – Phi owns the largest helicopter fleet operating in the U.S. While Phi has operated in 43 countries in the past, as of 2007 it has focused on the U.S. domestic market. In 2007, just 5% of revenues came from oversees operations.^[34]

References

1. ↑ BRS 2007 10-K, Item 1, Page 6
2. ↑ BRS 2007 10-K, Item 1, Page 6
3. ↑ PHI 2006 424B3, Item 1, Page 5
4. ↑ Oil Online – Flocking to bigger birds
5. ↑ Bristow Holdings Investor Relations – Fact Sheet
6. ↑ BRS 2007 10-K, Item 7, Page 32
7. ↑ BRS 2007 10-K, Item 1, Page 6
8. ↑ BRS 2007 10-K, Item 1, Page 6
9. ↑ BRS 2007 10-K, Item 7, Page 36
10. ↑ BRS 2007 10-K, Item 1, Page 6
11. ↑ BRS 2007 10-K, Item 7, Page 41
12. ↑ BRS 2007 10-K, Item 1, Page 7
13. ↑ BRS 2007 10-K, Item 7, Page 37
14. ↑ BRS 2007 10-K, Item 1, Page 7
15. ↑ BRS 2007 10-K, Item 7, Page 34
16. ↑ BRS 2007 10-K, Item 1, Page 6
17. ↑ BRS 2007 10-K, Item 7, Page 33
18. ↑ BRS 2007 10-K, Item 1, Page 9
19. ↑ BRS 2007 10-K, Item 7, Page 34
20. ↑ Arabian Business - Deep Water Boom
21. ↑ World Oil – Deepwater activating trends in the Gulf of Mexico
22. ↑ Arabian Business - Deep Water Boom
23. ↑ Oil Online – Flocking to bigger birds
24. ↑ Bristow Holdings Investor Relations – Fact Sheet
25. ↑ Oil and Gas Research: Past Hurricane Damage, disruptions less than expected
26. ↑ BRS 2007 10-K, Item 1, Page 7
27. ↑ The Oxford Princeton Programme - Shell halts Niger Delta after rebel attack
28. ↑ The Oil Drum - Nigeria – The Significance of the Bonga Offshore Oil Platform Attack
29. ↑ BRS 2007 10-K, Item 1, Page 6
30. ↑ Bloomberg: Energy Prices
31. ↑ BRS 2007 10-K, Item 1, Page 6
32. ↑ PHI 2006 424B3, Item 1, Page 5
33. ↑ Seeking Alpha - Bristow Group Inc. F4Q08 (Qtr End 03/31/08) Earnings Call Transcript
34. ↑ PHII 2007 10-K, Item 1A, Page 7
35. ↑ BRS 2007 10-K, Item 1, Page 5
36. ↑ CKH 2007 10-K, Item 4, Page 32
37. ↑ CKH 2007 10-K, Item 1, Page 14
38. ↑ CKH 2007 10-K, Item 7, Page 36
39. ↑ CHC Helicopter – Investor Relations
40. ↑ Yahoo! Finance – FLI Key Statistics
41. ↑ Rotorcraft Leasing Company - Fleet Info
42. ↑ Indeed - Rotorcraft Leasing
43. ↑ CKH 2007 10-K, Item 1, Page 11
44. ↑ CKH 2007 10-K, Item 1, Page 15