Bristow Group ($VTOL) — 2Q20 Update (6/16/20)

Price: $16 Market Cap: $515bn Valuation: 5x EBITDA / 6.4x FCF Category: Core

Bristow Group Inc (VTOL)

With the merger in the books, I thought it made sense to give an update on this stock…

For reference, here is the final merger proxy. This was a merger between Era Group and Bristow Group. Importantly, the highly regarded Era management team will be leading the combined business.

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With ~32m shares outstanding and a $16 stock price = $515m market cap

The deal highlighted $240m as the new EBITDA run-rate after achieving $35m in cost synergies. This assumed ERA was generating $40m in EBITDA and $165m for Bristow. But based on 1Q20 results, ERA looks more like $30-35m and if Bristow was proportionally the same then call it $125m there.

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Most of Bristow’s pro-forma EBITDA is coming from rent savings and helicopter leases going away… At least $68m of the $165m…

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Here are the future projections made by Bristow management for the standalone Bristow side of the business going into the merger:

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And here are Era’s management projections as part of the merger:

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On a combined basis, they were anticipating about $240m in EBITDA, 2x net leverage (~$480m net debt), and $140m in free cash flow:
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Perhaps some of the recent downturn in the oil markets puts a dent in a few of these figures…

My guess is that pro-forma EBITDA could be more like $190m… If interest expense is ~$75m and capex is $35m = $80m in FCF after factoring in oil market downturn. This would be $2.50 per share in FCF on a $16 stock price or 6.4x.

So you have a stock in a troubled industry trading at 5x EBITDA, 6.4x FCF, with 2x net leverage… What will they do here? Repurchase stock? Pay down debt? More M&A?

As for the risk in oil markets… Say what you will about rig counts and capex spending… Two main points come to mind here:

  1. Bristow/Era have minimal exposure to onshore oil or fracking — probably the most at-risk area in oil
  2. Oil production (not to be confused with exploration) in the Gulf of Mexico has been steady and growing for quite some time while rig count has recently reached 2016/2018 lows — this is the field most heavily serviced by Bristow/Era
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This management team has done a pretty heroic job of managing this business in a tough oil environment…

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The goal of 15-16% EBITDA margins look very achievable based on what Era management has done in the past (14-17% from 2016-2020)… My EBITDA figures above exclude any gains on asset sales.

Despite years of struggles and bankruptcies by all 3 major competitors, Era has held equity value stable for the past 7.25 quarters while taking net debt down from $270m to $46m…

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Capital allocation will be interesting to watch:

  • only recently has management felt comfortable with the balance sheet to start repurchasing stock
  • debt repayments could still be the priority until oil markets stabilize
  • M&A may still be on the table if PHI is still available following its bankruptcy process

Shares could easily appreciate 100% or more — a 7.5x EBITDA multiple would make a $30 stock — Era Group traded at >8x EBITDA during the past few years…