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CKH AT A GLANCE

P/E ► 8.47 AVG EV/EBITDA ► 6.77 AVG ROA ► 6.9% AVG ROE ► 11.7% AVG Debt to Equity ► 1.14 AVG Current Ratio ► 3.90 AVG Interest Coverage Ratio ► 5.98 AVG

 

 

 

 

 

 

Seacor Holdings Inc. (NYSE: CKH) operates a fleet of helicopters, cargo barges, and offshore support vessels used to supply and support offshore oil rigs. The damage left by Hurricanes Katrina and Rita in 2005 left Seacor’s services in high demand, as oilfield services companies in the Gulf needed supplies and support crews transported to and from their rigs. Its aviation and offshore marine services segments also benefit from rising oil prices, which lead to increased investment in offshore oil and gas projects. Competition in Seacor’s water transportation businesses is scarce, with the Jones Act requiring that all domestic seafaring vessels be owned, operated, and manned by U.S. citizens. Unfortunately for Seacor, the Jones Act also requires all domestically operated vessels to be built in the U.S., driving barge construction costs through the roof. On the plus side, Seacor’s inland river transportation segment replaced most of its aging barges before rising steel prices began to increase construction costs further, giving it a one-up over competitors. Furthermore, over half of its revenue comes from wheat transportation contracts. Domestic wheat supply has been falling as many farmers switch to growing corn, for which demand has been rising quickly due to rising demand for ethanol, and because of poor weather . Seacor has been able to outmaneuver competitor American Commercial Lines and avoid the negative impact that the falling wheat supply would have on its barge utilization by shrinking its wheat transportation fleet.

Business & Financials

Seacor Holdings is composed of five business segments, and has a market cap of $2 billion.^[1]

Source: ^[3]

• Aviation Services: This segment comprised 16% of Seacor’s revenue in 2007. It provides helicopter transportation services for offshore oil and gas exploration, development, and production, for hospitals, and for flight seeing tours in Alaska with its 80 small helicopters and 44 medium sized helicopters. The segment saw a $59.0 million increase in revenues from 2006 to 2007, 61% of which came from the early 2007 purchase of EraMED. Operating income turned green that year, after a loss of $7.4 million (excluding gains on asset sales) in 2006. The loss was caused by wage increases and heavy spending on upgrading the fleet to meet the increased demand caused by Hurricanes Katrina and Rita. 8% of the segment's revenue came from foreign operations in 2007.^[4]

• Inland River Services: This segment accounted for 9% of Seacor’s revenue in 2007, and operates 985 dry cargo barges and 73 liquid cargo tank barges. Although it transports products like petrochemicals, black oil products,iron ore, steel, coal, and ethanol along the U.S. inland river system, 57% of its revenues were earned through grain transportation in 2007. With the sale of 61 dry cargo barges in 2007, revenues fell $26.2 million from 2006. However, rising grain prices combined with the sales caused operating income to grow $11.3 million, from $60 million. ^[5]

• Marine Transportation Services: This segment earned 9% of Seacor's revenues in 2007. It transports petroleum products and chemicals along the U.S. coast. After a merger with Seabulk in July of 2005, revenue increased from $42.4 million in 2005 to $144.738 million in 2006. Operating income has been negative since, as one of its ten ships underwent expensive retrofitting to

meet regulatory requirements.^[6]

• Environmental Services: The segment provides emergency preparedness consultations and emergency response services to oil, chemicals, industrial, and marine transportation companies both in the U.S. and abroad. In 2007 it comprised 11% of Seacor’s revenue. As oil spills are infrequent, the segment's revenues are highly unpredictable. In response, Seacor has pursued an acquisitions strategy focused on increasing its consulting base, where more consistent revenues can be earned. From 2006 to 2007, consulting and project management revenues increased 28%, while spill response revenues fell 8%, leaving the segments total revenues at $156.8 million, $12.3 million higher than 2006. The four acquisitions made in 2007 raised expenses and left operating income at $17 million.^[7]

• Offshore Marine Services: This segment employs 206 support vessels to assist offshore oil and gas exploration , development, and production. These vessels deliver personnel and cargo, handle anchors and other marine equipment, and support offshore construction and maintenance work. This segment accounted for 51% of the company’s revenues in 2007. 48% of those revenues came from U.S. operations, 23% from Africa, 11% from the U.K., and 18% from the Middle East, Asia, Mexico, and Central and South America. In response to higher oil and gas prices, the segment's customers have been operating at high levels. From 2005 to 2007, revenue grew 44%, and operating income grew 28%. From 2006 to 2007 revenue and income growth flattened even while rates rose due to a shrinkage in the segment's fleet.^[8]

Trends and Forces

Natural Disasters Are A Boon To Seacor’s Business, If They Happen in The Right Place

Hurricanes Katrina and Rita, in 2005, struck 75% of the oil and gas platforms in the Gulf Coast.^[9] The boost to Seacor’s offshore business far outweighs any damage caused to its aviation and transportation segments. Needing rapid repairs, energy companies in the area pushed the rates of Seacor’s offshore marine segment 50% higher. That year, the segment’s operating income also increased 136.7%.^[10]Demand for Seacor’s environmental cleanup and aviation services also rapidly increased. While it has not yet been definitively proven that global warming creates more intense weather patterns, hurricane intensity was nearly 100% greater at the start of 2008 than it was in 1990.^[11] Hurricane Rita itself caused more damage to oil platforms than any other storm has in the past.^[12]

By Shrinking its Grain Transportation Fleet, Seacor has been Able to Keep Transporting American Grain at Capacity, Despite Falling Grain Supply

In 2007, 57% of Seacor’s Inland River Services transportation volume in tons was grain.^[13] From September of 2006 to September of 2007, wheat prices more than doubled.^[14] Wheat prices rose mostly because domestic supply fell. Domestic supply fell as poor weather hurt yields and farmers switched to corn based ethanol, of which demand has be skyrocketing. With less wheat needing transportation, competitor American Commercial Lines was unable to sign enough contracts to keep its barges as busy and profitable as the year before. ^[15] Seacor, however, has been decreasing the size of its fleet – in 2007 it sold 61 dry cargo barges.^[16] As a result, Seacor has been able keep operating its barges at capacity. As long as domestic wheat production does not fall any farther, the segment’s margins will remain high, at 58.7% in 2007. ^[17]

Oil and Gas Prices Affect Demand for Seacor’s Services

In 2007, 48% of the operations of Seacor’s offshore marine services and 58% of aviation services were conducted in the Gulf of Mexico. ^[18] Activity in the Gulf of Mexico depends on oil and gas prices, which encourage greater investments in offshore wells as upstream petroleum companies try and increase production to take advantage of the price environment. For example, over the past year, oil prices have more than doubled.^[19] In response, in the first quarter of 2008, one of Seacor's key customers, Exxon Mobil added 85,000 acres in the Gulf of Mexico to its deepwater exploration portfolio. ^[20] This creates new opportunities for Seacor, as Exxon moves rigs to the unexplored regions and needs Seacor's supply transport services. Higher oil prices also raise Seacor's fuel expenses, but these are mostly recovered through fuel surcharges or contractual arrangements which require the customer to pay for fuel.

The Jones Act Prohibits Foreign Competition

The Jones Act mandates that all domestic cargo vessels be built, owned, operated and manned by U.S. citizens.^[21] The Jones Act protects a large portion of Seacor’s offshore marine services, marine transportation services, and inland river services from competition, as 48% of Seacor’s revenue is generated in the U.S. ^[22] However, the Act also raises vessel construction costs, as there is a virtual duopoly in the barge manufacturing industry - Trinity Industries (TRN) and American Commercial Lines (ACLI) combined have 99% of the industry's market share.^[23] Rising steel prices and poor competition coupled with many barges hitting retirement and needing replacement caused construction costs to increase by more than 40% in 2006.^[24] Steel prices have risen by more than 40% since; consequently, new construction contracts will be even more costly.^[25]

Competition

Helicopter Services Competition

Competition in this industry is based primarily on price and the availability of particular helicopter classes.

• BRISTOW GROUP (BRS) – Bristow Group operates the largest helicopter fleet. However, just 23% of its revenues are earned in the U.S. Its acquisitions strategy has focused on expanding its international fleet.^[26]
  
• 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 domestic helicopter fleet. 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.^[27]

Inland River Competition

Seacor’s inland river segment is a minor player in its industry, facing competition from many companies 2x-3x its size.

• Ingram Barge Co. – Ingram is the largest dry cargo barge operator in the U.S. river system. Although its dry cargo fleet is younger than the average, its liquid cargo fleet is in a replacement cycle and faces a delivery delay of over a year.
  
• American Commercial Lines (ACLI) – ACLI is the second largest operator in the dry cargo industry, but has been increasing its exposure to the more lucrative liquid transportation industry while reducing the size of its dry cargo fleet. ACLI owns its own barge manufacturing company, minimizing its ship replacement time and costs.
  
  

Seacor Inland River Services does not have the advantages of its large competitors, like fast ship availability and economies of scale of in purchasing ships and equipment. However, Seacor replaced its aging fleet before the barge replacement cycle starting in 2007, avoiding the impact on prices of greater demand and higher steel prices.

Source: ^[36]

Offshore Marine Services

Competition in this industry is based primarily on price and the availability of particular vessel types.

• Tidewater (TDW) – Tidewater owns the world’s largest fleet of offshore supply vessels. The company has focused on supplying deepwater and ultra-deepwater drillings.
• Trico Marine Services (TRMA) - Trico’s growth strategy focuses on expanding its international operations, while concurrently withdrawing from less profitable markets. Since 2004, it has reduced the number of vessels in the Gulf of Mexico by 50%, as it views the region as offering few long term growth opportunities. ^[37]

Some other, minor competitors: Hornbeck Offshore Services (HOS), Hercules Offshore (HERO), Superior Energy Services (SPN), Helix Energy Solutions Group (HLX), and GulfMark Offshore (GMRK).

Marine Transportation Competition

Seacor’s marine transportation segment faces competition from larger companies, like Frontline, Overseas Shipholding Group, General Maritime Corporation, but also one of more comparable size, Double Hull Tankers.

References

1. ↑ Yahoo! Finance: Seacor Holdings Inc
2. ↑ CKH 2007 10-K, Item 7, Page 36
3. ↑ CKH 2007 10-K, Item 7, Page 36
4. ↑ CKH 2007 10-K, Item 7, Page 48
5. ↑ CKH 2007 10-K, Item 7, Page 46
6. ↑ CKH 2007 10-K, Item 1, Page 9
7. ↑ CKH 2007 10-K, Item 7, Page 50
8. ↑ CKH 2007 10-K, Item 7, Page 40
9. ↑ Oil and Gas Research: Past Hurricane Damage, disruptions less than expected
10. ↑ CKH 2007 10-K, Item 7, Page 44
11. ↑ Hurricanes: A Global Warming Connection?
12. ↑ Financial Times: Rita causes record damage to oil rigs
13. ↑ CKH 2007 10-K, Item 7, Page 46
14. ↑ USDA: Winter Wheat Prices
15. ↑ ACLI 2007 10-K, Item 7, Page 44
16. ↑ Reuters: Seacor Holdings Inc
17. ↑ CKH 2007 10-K, Item 7, Page 46
18. ↑ CKH 2007 10-K, Item 1A, Page 23
19. ↑ Bloomberg: Energy Prices
20. ↑ Seeking Alpha: ExxonMobil Corp. Q1 2008 Earnings Call Transcript
21. ↑ Aker American Shipping: Jones Act Background
22. ↑ CKH 2007 10-K, Item 7, Page 40
23. ↑ American Commercial Lines Investor Presentation May 21, 2007
24. ↑ Nationwide scramble is on to build more barges
25. ↑ World Carbon Steel Transaction Prices
26. ↑ BRS 2007 10-K, Item 1, Page 6
27. ↑ PHII 2007 10-K, Item 1A, Page 7
28. ↑ BRS 2007 10-K, Item 1, Page 5
29. ↑ CKH 2007 10-K, Item 4, Page 32
30. ↑ CKH 2007 10-K, Item 1, Page 14
31. ↑ CKH 2007 10-K, Item 7, Page 36
32. ↑ Rotorcraft Leasing Company - Fleet Info
33. ↑ indeed - Rotorcraft Leasing
34. ↑ CKH 2007 10-K, Item 1, Page 11
35. ↑ CKH 2007 10-K, Item 1, Page 15
36. ↑ ACLI 2007 10-K, Item 1, Page 11
37. ↑ TRMA 2007 10-K, Item 1, Page 3
38. ↑ TDW 2007 10-K, Item 1, Page 7
39. ↑ TMRA 2007 10-K, Item 1, Page 4
40. ↑ FRO 2006 10-K, Item 4, Page 26
41. ↑ OSG 2006 10-K, Item 1, Page 9
42. ↑ GMR 2006 10-K, Item 6, Page 16
43. ↑ 2007 DHT, 20-F, Item 4, Page 19