Bristow Group BRS 6.25 10/15.2022
March 04, 2016 - 12:40pm EST by
Drew770a
2016 2017
Price: 60.00 EPS 0 0
Shares Out. (in M): 35 P/E 0 0
Market Cap (in $M): 400 P/FCF 0 0
Net Debt (in $M): 1,100 EBIT 100 100
TEV ($): 1,700 TEV/EBIT 17 17

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  • High Yield
  • Distressed
  • Oil Price Exposure
  • Transportation
 

Description

BRS's high yield debt, priced at 60c, offers a compelling risk / reward.  I took a look at the stock after the recent write-up, and concluded that the debt is a superior investment. I recommend reviewing the write-up, which has good details on the value of the aircraft.  It is covered by energy analysts, but the debt lends itself more to an aerospace / asset based analysis.  I see a 2 year 90% return, as the debt returns to par and investors collect a 6.25% coupon (or 10%+ current yield)

1) Asset value: Company's aircraft was last year worth about $3bn.  These helicopters are very large, and cost $25-30mm.  Unfortunately there isn't yet a secondary market for these aircraft, so how large of a writedown to secondary values to clear in other areas is uncertain. i.e. SAR (Search and Rescue), use diff't aircraft.  However, by buying the high yield debt at 60c, you are essentially buying the helicopters for about 30c - a way too distressed value

2) Value ex-SAR: BRS will be generating around $100mm of EBITDA from UK SAR operations.  Historically BRS has traded at 6-8x EBITDA.  Even though this is 'safer', gov't contract, using just a 6x EBITDA multiple on this run rate means that you are paying only $400mm for fixed wing/heli operations with at least $2.5bn replacement value

3) EV/Sales: I don't think offshore oil and gas will go to 0, though in the current market environment, will likely shrink. It will be painful, but for a assuming that current LTM revenue (ex SAR) declines by a large 40%, the company will be generating around $1.1bn in revenue (note most of its oil & gas is related to production, maybe 60%, so this assumes exploration at 20% goes to 0 and there are 30% price cuts / revenue reductions on the rest of oil and gas business).  BRS has traded b/t 1 - 2x EV/Sales.  Thus, this reduced oil and gas business should be worth $1.1-$2.2bn (+ another $600mm), which covers the the debt by 50% in a lower case. I'd note that the equity is currently pricing the low end of this distressed range ($1.7bn EV)

4) Franchise Value:  BRS has a high value network with pilot training and certifications.  This is very valuable and hard to replace.  Given the plethora of PE and distressed money, I think that being able to buy this franchise + helicopters for just $1.1bn is a very attractive return

5) Other de-risking: BRS was rumored to be selling shares at $30, and they didn't. At $17 they could sell another $100mm of shares - dilutive, like WFT, but maybe necessary. Good for the debt though.

Leases: BRS has a significant amount of helis leased - unfortunately they don't start rolling-off for a couple of years, but should enable them to boost utilization of owned aircraft

Order Book: Heli OEMs have been clear that they don't really have backlog, just LOIs, meaning that the energy players aren't taking delivery (and probably couldn't pay for them anyway) of existing contracts.

The bigger risks are near term that earnings continue to degrade and BRS needs to go to the market to fund capex for the SAR build-out.  I think they'd first try and hit the equity markets.  Though models don't project them needing cash - those same models have been quite wrong.

The longer term risks are continued deterioration in oil, going and staying below $30 for a while (and the curve going below $30, as many of the E&Ps are hedging out based on the curve, and making noise that offshore now works north of $40). 

The question you'd have to ask is even if BRS goes bankrupt, would you be content either a) having helicopter asset coverage or b) would you be happy to have re-org equity at 30% of replacement cost for a market leading franchise.  I'm also content with that, as a I see the off-shore market still existing for many years.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Oil markets stabilizing.  BRS maintaining cash flow breakeven through completion of SAR capex needs.

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    Description

    BRS's high yield debt, priced at 60c, offers a compelling risk / reward.  I took a look at the stock after the recent write-up, and concluded that the debt is a superior investment. I recommend reviewing the write-up, which has good details on the value of the aircraft.  It is covered by energy analysts, but the debt lends itself more to an aerospace / asset based analysis.  I see a 2 year 90% return, as the debt returns to par and investors collect a 6.25% coupon (or 10%+ current yield)

    1) Asset value: Company's aircraft was last year worth about $3bn.  These helicopters are very large, and cost $25-30mm.  Unfortunately there isn't yet a secondary market for these aircraft, so how large of a writedown to secondary values to clear in other areas is uncertain. i.e. SAR (Search and Rescue), use diff't aircraft.  However, by buying the high yield debt at 60c, you are essentially buying the helicopters for about 30c - a way too distressed value

    2) Value ex-SAR: BRS will be generating around $100mm of EBITDA from UK SAR operations.  Historically BRS has traded at 6-8x EBITDA.  Even though this is 'safer', gov't contract, using just a 6x EBITDA multiple on this run rate means that you are paying only $400mm for fixed wing/heli operations with at least $2.5bn replacement value

    3) EV/Sales: I don't think offshore oil and gas will go to 0, though in the current market environment, will likely shrink. It will be painful, but for a assuming that current LTM revenue (ex SAR) declines by a large 40%, the company will be generating around $1.1bn in revenue (note most of its oil & gas is related to production, maybe 60%, so this assumes exploration at 20% goes to 0 and there are 30% price cuts / revenue reductions on the rest of oil and gas business).  BRS has traded b/t 1 - 2x EV/Sales.  Thus, this reduced oil and gas business should be worth $1.1-$2.2bn (+ another $600mm), which covers the the debt by 50% in a lower case. I'd note that the equity is currently pricing the low end of this distressed range ($1.7bn EV)

    4) Franchise Value:  BRS has a high value network with pilot training and certifications.  This is very valuable and hard to replace.  Given the plethora of PE and distressed money, I think that being able to buy this franchise + helicopters for just $1.1bn is a very attractive return

    5) Other de-risking: BRS was rumored to be selling shares at $30, and they didn't. At $17 they could sell another $100mm of shares - dilutive, like WFT, but maybe necessary. Good for the debt though.

    Leases: BRS has a significant amount of helis leased - unfortunately they don't start rolling-off for a couple of years, but should enable them to boost utilization of owned aircraft

    Order Book: Heli OEMs have been clear that they don't really have backlog, just LOIs, meaning that the energy players aren't taking delivery (and probably couldn't pay for them anyway) of existing contracts.

    The bigger risks are near term that earnings continue to degrade and BRS needs to go to the market to fund capex for the SAR build-out.  I think they'd first try and hit the equity markets.  Though models don't project them needing cash - those same models have been quite wrong.

    The longer term risks are continued deterioration in oil, going and staying below $30 for a while (and the curve going below $30, as many of the E&Ps are hedging out based on the curve, and making noise that offshore now works north of $40). 

    The question you'd have to ask is even if BRS goes bankrupt, would you be content either a) having helicopter asset coverage or b) would you be happy to have re-org equity at 30% of replacement cost for a market leading franchise.  I'm also content with that, as a I see the off-shore market still existing for many years.

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Oil markets stabilizing.  BRS maintaining cash flow breakeven through completion of SAR capex needs.

    Messages


    Subjectgood idea
    Entry03/08/2016 02:27 PM
    Memberskierholic

    Looking at this again....I do agree that HY bond offer superior risk/reward profile than equities in this case!

    Lesson learnt for me: Looking down the capital structure for a fundamentally strong cyclical business going into a downturn is a very good idea!

    Good analysis!


    SubjectRe: good idea
    Entry03/08/2016 05:32 PM
    MemberDrew770a

    Thanks for the comment and your write-up - it was definitely very helpful in getting comfort investing in the bonds in a downside / NAV value

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