Description

Bristow Group (VTOL) operates a fleet of 227 aircraft, primarily helicopters serving the offshore oil and gas market and government search and rescue (SAR).   I think the return potential for the stock ranges from 100% to 200% over the next few years. 

The current version of VTOL was formed when ERA Group acquired Bristow Group out of bankruptcy in 2020.  Unfortunately, the offshore O&G aviation industry followed a similar path to the offshore drilling rig companies, with most filing for bankruptcy.  Recently, the rig companies have been reporting better-operating results and improving business conditions, which has been reflected in stock price increases of 100% to 200%.   Over the next few years, the O&G aviation business will likely experience the same dynamic as the drillers.  The good news is that the upside is not yet reflected in the valuation of VTOL. 

Offshore Oil and Gas (O&G). 

VTOL derives about 60% of its current revenue from the 0&G  segment.  The company recently stated that the offshore energy market has entered into a multi-year growth cycle and that this should become evident in its financials in 2023. 

Much has been written and discussed about the offshore market in general, including the write-up on VAL on VIC, with much commentary on the oil market.  In short, the oil market is tight, with minimal spare capacity.  The world has recently witnessed the most significant inventory draw in history over the last two years, equaling about 800 million barrels.  This draw occurred despite the United States selling 200 million barrels from its strategic … or better said its mid-term petroleum reserve.  The back half of 2023 could see further inventory depletion of 1 to 2 million barrels daily, leaving global inventories at lower levels than we have seen in 30 years.  With OPEC essentially flat-lining and U.S. shale growth expected to be modest, offshore exploration will likely continue its recovery.  According to current research, offshore spending is expected to increase 25% in 2023 and keep up double-digit increases at least through 2025.

VTOL operates in the major offshore basins, including the North Sea, Africa, U.S. Gulf, and Brazil.  Contracts for flight services with offshore drillers are typically for five years, so there is and will continue to be a lag in reported numbers equating to current market conditions for aviation services.  As indicated, VTOL is just starting to experience these gains, with VTOL communicating that it will begin to show up in the second half of 2023.  Those gains should continue well into the future as aircraft come off contract, say 20% a year, generally being re-priced from low-price contracts.  Another factor is the tightening overall asset market in offshore helicopters, with utilization in the low 90’s overall, a very thin order book, and lag times as long as four years for parts.    

Search and Rescue (SAR)

VTOL derives about 30% of its revenue from Search and Rescue contracts.  These are with various governments and include recent new 10-year contracts with The Netherlands and the Dutch Caribbean Coast Guard and a new four-year contract with Norway.  However, the most significant growth driver in this more stable segment is a $1.6 billion expanded 10-year contract with the UK starting in 2024, with a complete transition by December 2026.  VTOL will spend $160 million for new and existing aircraft modifications as part of the contract.  

Capital Structure and Valuation

VTOL has cash of $164 million and debt of $543 million.  In January 2023, VTOL refinanced its existing equipment financing debt with a new facility for $145 million, of which $138 million was drawn.  The financing has a thirteen-year term with repayment due in quarterly installments.  The interest rate is SONIA plus 2.75%.  In addition, VTOL has an ABL facility due May 2027 of $85 million, with $5 million drawn at SONIA plus 2.00%.  The last piece of debt is $400 million in Senior Secured Notes at 6.875% due March 2028. 

The current stock price is $22.40.  Shares outstanding are 28 million for an equity value of $627 million.  EV is approximately $1 billion.  VTOL has a practice of obtaining a third-party appraisal of all owned aircraft each year.  That appraisal and other assets at book value less net debt results in a 2022 valuation of $1.325 billion or $48 per share.

The company forecasts 2023 EBITDA to be in the range of $150 to $170 million, about a 20%  increase from 2022.  Interest, cash taxes, and maintenance capx are forecast at about $90 million, with growth capx of $80 million (primarily related to the new UK SAR contract).  So about to break even after growth spending.  That should change significantly in 2024 and beyond with trends of rising EBITDA and the end of the expenditure for equipment on the new UK contract. 

Looking at the medium-term and full potential from the O&G segment in a better rate environment, I guestimate VTOL can increase EBITDA by $25 million by putting all existing idled equipment under contract and another $100 million by a 10% rise in contract rates across its fleet.  This segment's revenue would be about $1 billion before the rate increase.  I get another $25 million in EBITDA for the SAR segment from the new contracts in the Netherlands and the expanded UK contract adding up to 2023 EBITDA of $320.  As a check, EBITDA for the two companies combined (ERA and Bristow) was around $400 million before the downturn in 2015. 

At $320 million less $50 million in cash taxes, $40 million in interest, and $25 million in maintenance capx (equal to the 2023 maintenance capx number provided by the company), nets $205 million in free cash, at 10X that’s approximately $2 billion of equity value or $70 per share.

 It could take until 2027 to reach this level of EBITDA as it requires 100% of the contracts to reset higher at that rate.  Certainly, the rate resets could be higher… or lower if the offshore renaissance stalls.

In general, though, I think EBITDA will continue with significant year-over-year gains going forward, which could lead to some enthusiasm for the stock and the market pricing in that growth well ahead of 2027.

Management

VTOL’s CEO, Chris Bradshaw came from ERA Group.  This is positive; the old Bristow’s management was poor.  Mr. Bradshaw navigated the deep slump in the O&G aviation business with ERA and came out the other side.  He also successfully purchased Bristow, a larger company out of bankruptcy, and has positioned the combined entity to prosper with improving industry conditions.  He began with ERA as CFO in 2012 and became CEO in 2014.  Before ERA, he held energy investment banking positions with Paine Webber, Morgan Stanley, and UBS.   He is a graduate of Dartmouth College.  I view his stewardship, capital decisions, and communication favorably as an investor. 

Catalyst

Contract resets in the O&G segment at much higher rates.  

New contract wins in the SAR segment including an expanded 10-Year $1.6 billion contract with the UK.