Bristow Group ($VTOL) — 2Q21 Update (8/7/21)

Price: $27 Market cap: $760m Valuation: 6.3x EBITDA / 6.1x FCF Target price: $35

This stock has not been a strong performer over the past few years (outside picking it off during the COVID sell-off)…

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As a quick catch-up… This was the former Era Group ($ERA) helicopter operator which managed the oil market downturn fairly well by preserving book value, focusing on cash generation, and repaying debt. Then they merged with bankrupt competitor Bristow Group in June 2020 to become the “new” Bristow Group… Era management has continued to run the combined business.

So we’re at our first 4 quarters into the post-bankruptcy company and things are still playing out…

3Q20 to 2Q21 financial overview

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Highlights from the 2nd quarter:

  • Q2 revenue was $301m — declined 1.6% Yoy / grew 2.5% QoQ
  • Q2 EBITDA (excluding gains on asset sales) was $40m — YoY decline of 16% / QoQ increase of 32%
  • Generated $33m in FCF during Q2, spent $3m on capex, and sold ~$11m in assets
  • Buybacks of $22m in the quarter and another $15m in July 2021 (post Q2 close)

Updates on this situation and position…

When the Era-Bristow merger was announced prior to COVID, it was anticipated they’d have $1.5bn in combined revenue, $240m in EBITDA (after achieving cost savings), and $140m in adjusted free cash flow…

Then the deal closed in June 2020 and with COVID hitting the oil & gas markets, those figures were updated to $1.4bn in revenue and $200m in EBITDA….

Now that we’re a full 4 quarters into the merger, we can see that trailing 12-month revenue was $1.2bn, EBITDA was $172m, and FCF looks like $125m (excluding cost savings).

So we’re sitting well below the initial targets laid out as part of the merger (a likely contributor to share price underperformance)…

But there are some bright spots…

First is the upside in cash flow. Originally, it was anticipated that Bristow would generate $140m in combined FCF. Over the past 4 quarters, they generated $125m while spending $18m on restructuring and $26m in merger costs…

These adjustments would get us to a baseline of $165m in FCF today or ~$5.90 per share. Way, way above the $140m anticipated, despite producing $70m less EBITDA.

In the chart below, I do not include asset sales as part of my ongoing FCF calculation.

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Second, they thought net debt was going to be closer to $495m for the combined company and today we’re at $325m… Part of this favorable decline in debt was from $67m in asset sales but also the much better than expected cash generation. So leverage is way lower today than was anticipated at the outset of the merger. With $172m in trailing EBITDA, net leverage is 1.9x.

Third… Because of the lower than expected leverage and better than expected cash generation, management is starting to use cash to buyback shares earlier than expected. They spent $22m in the past quarter and another $15m after the quarter ended. Well over 6% of shares outstanding have been repurchased over the past 12 months.

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My estimates call for another year of $175m in EBITDA before seeing a recovery in offshore oil demand starting late 2022 / early 2023.

Without any recovery in EBITDA, a realistic estimate of FCF would be ~$125m per year or $4.50 per share. This assumes $175m EBITDA less $40m interest expense less $10m in capex and zero cash taxes or working capital outflows.

Given the health of the balance sheet, I’d guess they’ll spend 50% of FCF on repaying debt and the other 50% in repurchasing shares… As an example, if they played that exact scenario out over the next 4 years ($175m EBITDA / $125m FCF):

Bristow would generate $500m FCF — retire $250m in debt and 9m in shares outstanding. This would mean a 10% FCF growth rate from today to 2025 and < 0.5x leverage at yearend 2025. A simple 10x FCF multiple on 2025 estimates would = $65 share price for a 25% annual return…

What I like here is that you don’t need a whole lot to go right to do well… And management is already best-in-class in managing difficult energy markets.