It should come as no surprise that in uncertain economic conditions, automobile sales fall and grocery demand remains resilient. The former represents discretionary expenditures, while the latter relates to daily necessities. Similarly, operating expenditures committed to oil and gas production are less likely to be cut when oil prices fall, compared with capital expenditures related to exploration and development.
Bristow Group , the largest global provider of helicopter services to the offshore energy industry, has relatively stable revenue streams with a significant majority of revenue from the production segment, and a favorable two-tier contact structure comprised of a large fixed-fee component independent of utilization.
A majority of Bristow’s revenue represents non-discretionary expenditures for its clients
Most oil and gas service companies are perceived as volatile investments because their businesses are highly dependent on the discretionary capital expenditures committed by their clients to exploration and development. Bristow is different from most of them in that it derives only about 30% of its revenue from the exploration and development segments. Bristow generates approximately 60% of its turnover from the production segment, which represents more of non-discretionary operating expenditures for its clients.
Furthermore, it is also increasing the proportion of work done for search-and- rescue operations, which is mostly non oil-and-gas related. This segment should also benefit from increased outsourcing of search-and-rescue operations by governments to private vendors. There is sufficient room for growth given that search-and-rescue operations currently account for less than 10% of Bristow’s sales.
Unique contract structure provides stability
Bristow’s helicopter contracts are governed by a two-tier structure with daily or monthly fixed fees pertaining to the reservation of helicopter capacity representing 65% to 70% of contract revenue, and the remaining contract revenue is comprised of variable incremental fees charged based on hours flown. There is a strong element of stability and predictability for Bristow’s revenue given the large proportion of contracted revenue, which is not dependent on actual utilization.
Helicopter assets provide a floor for valuation downside
Many investors are skeptical of net-nets and low P/B stocks, as they think that book values are rarely an accurate reflection of the true earnings power of a stock. In my opinion, the quality, and not the quantity, of assets matters. For example, assuming the same dollar value of perishable inventories and real estate in prime city areas, it is obvious that the latter is worth much more than the former.
In Bristow’s case, aircraft and equipment make up about 78% of its total assets. Saleability is a key factor in determining the quality and intrinsic value of assets. Helicopters are widely used in areas such as air medical emergency transport services, military, construction and tourism. Trading at 0.7 times PEG and 1.4 times P/B, the asset value of helicopters provides a certain margin of safety for investors who misjudge the earnings power of Bristow
Bristow’s peers include Era Group and Air Methods .
Similar to Bristow, Era Group derives the lion’s share (67%) of its revenue from the oil and gas segment, supported by a relatively smaller search-and-rescue operations segment representing 6% of sales. However, I prefer Bristow over Era Group, given its geographical diversification. No single country accounted for more than a quarter of Bristow’s fiscal 2013 revenue, while Era Group generates close to 80% of its revenue from North America, with the U.S. Gulf of Mexico representing a significant portion of its oil and gas turnover.
Era Group makes up for this lack of international exposure through its contract-leasing business, which makes up one-fifth of its revenue. The contract leasing business represents a low cost entry strategy for Era Group to enter new developing markets where it does not have the necessary infrastructure to run the entire operations on its own. Despite this, I still favor Bristow for its full exposure to diversified international markets.
Air Methods is differentiated from Era Group and Bristow given its exclusive focus on air medical transportation services, being the largest player in the U.S. While it has a mix of both fixed and variable revenue similar to Bristow, Air Methods has a higher proportion of non-contract variable revenue. For the trailing-12 months, Air Methods generated more than 70% of its sales from its non-contractual patient- transport business where it assumes ownership of the program, with the remaining 30% of revenue generated from long-term vendor contracts with hospitals providing on medical services.
I am not considering Air Methods, given its large percentage of non-contractual revenue. This was validated by its first-quarter fiscal 2013 results, where revenue fell 7% largely because of severe weather affecting patient transports. In addition, Air Methods has the weakest balance sheet of the three with a gearing of 224%.