The Aerial Workhorse of the Energy Sector

“The helicopter approaches closer than any other [vehicle] to fulfillment of mankind’s ancient dreams of the flying horse and the magic carpet.”
                                                            —Igor Sikorsky, builder of the world’s first functioning helicopter

Farther out to sea and faster back to shore—that’s increasingly the demand of energy companies on Bristow Group (NYSE: BRS), the leading provider of helicopter services for the offshore oil and gas industry.

The global energy boom combined with advances in drilling technology is allowing companies to operate rigs in water that’s deeper than previously feasible. Bristow is positioned to reap more of the profits from this deepwater activity than any other helicopter operator.

Based in Houston with a market cap of $2.4 billion, Bristow currently operates 556 helicopters, the world’s largest commercial offshore rotorcraft fleet. The company’s fleet also includes 40 fixed-wing aircraft.

About 99 percent of Bristow’s revenue stems from offshore oil and gas transportation. The remaining revenue is generated by the company’s search and rescue services, helicopter maintenance facilities, and pilot training academy.

Bristow’s presence is vast, with operations in virtually every region of the world.

High oil prices are stimulating greater investments in offshore wells, raising rig utilization. These rigs require helicopters to transport crews and gear back and forth on a frequent, intraday basis—and to do it safely.

Helicopter activity in the offshore support sector is directly proportional to the capital and exploration outlays of the oil industry. It’s also axiomatic that capital and exploration expenditures are directly influenced by the prices of crude oil. As oil prices continue to hover at around $100 per barrel, companies such as Bristow are assured of steady demand.

As the largest company of its type, Bristow is thriving from the huge surge in deepwater drilling around the world. Shallower oil prospects are always drilled first. For that reason, the prolific oil discoveries of the future like beneath water deeper than 600 feet—the level typically considered the deepwater mark.

What’s more, new discoveries in the Gulf of Mexico, Brazil and West Africa have broken existing deepwater records, pushing rigs into water that’s 3,000 feet deep or more—and it’s this type of “ultra-deepwater” drilling that’s proving a particular boon for Bristow. Safe and efficient transport to these remote rigs requires seasoned helicopter operators with the most advanced helicopter models.

Bristow’s competitors, such as Louisiana-based PHI (NASDAQ: PHII), formerly known as Petroleum Helicopters Inc., lack the company’s economies of scale and global reach, particularly in promising emerging markets.

Bristow is in rapid expansion mode among its offshore energy clients in Argentina, Brazil, Colombia, Mexico and Venezuela. These countries are all heavily dependent on the oil industry, creating a reliable, intrinsic need for the unique capabilities of helicopters.

Further fueling helicopter demand in Latin America is rugged topography combined with insufficient infrastructure. The company also trains government pilots in the region for counter-terrorism and drug interdiction.

Bristow views Brazil as the “North Sea” of South America and maintains considerable operations in the country. The company recently acquired 42.5 percent of Lider Aviacao Holding SA, Brazil’s largest provider of helicopter and executive aviation services.

But Latin America isn’t the only source of growth. In September 2012, Bristow paid $250 million to acquire Cougar Helicopters, the largest offshore energy helicopter operator in Canada, another country where oil and gas activity is thriving.

Bristow’s Russia-based operations also offer promise. This resource-rich country is home to fewer than 2,000 helicopters, with only half in flyable condition, creating a vital need for reliable operators such as Bristow.

Bristow is expanding its non-energy work as well. In March, the company announced that its Aberdeen, Scotland-based subsidiary would take over the United Kingdom’s helicopter search and rescue operations. The 10-year contract is worth £1.6 billion and it ends 70 years of search and rescue that historically has been performed by the Royal Air Force (RAF) and Royal Navy.

Bristow’s modern fleet of helicopters, including Sikorsky S-92 and AgustaWestland 189 models, will replace the government’s aging Sea Kings. Under the new contract, 22 helicopters will operate from 10 locations around the UK.

The Helicopter Industry Takes Off

According to the results of Honeywell International’s (NYSE: HON) annual Turbine-Powered Civil Helicopter Purchase Outlook survey, worldwide deliveries of new civil helicopters will total between 4,900 and 5,600 units from 2013 to 2017.

Released in March, the five-year forecast reflects strong demand in every region of the world in all rotorcraft sectors, especially in offshore transport. Purchase plans for new helicopters for this three-year time frame are 35 percent higher than last year’s survey.

This survey shows buyer confidence is strong, which translates into more demand for operators such as Bristow. Meanwhile, as oil and gas exploration goes farther and deeper, oil companies increasingly rely on experienced helicopter transport companies. Bristow alone expects to take delivery of 48 new aircraft by 2017.

These secular trends have been providing a vertical lift over the past 12 months for Bristow’s stock (see graph, below).

For the third quarter of its fiscal 2013 (ended Dec. 31), the company reported earnings per share (EPS) of $1.14, beating analysts’ consensus estimate of $0.87 by $0.27. The company generated revenue of $388.47 million for the quarter, compared to the consensus estimate of $359.53 million.

During the same quarter in the previous year, the company posted $0.76 in EPS. The company’s revenue for the quarter was up 17.2 percent on a year-over-year basis.

For the next several years, oil and gas companies will continue to rely on Bristow to make the most of every working minute on remote rigs. But the company is taking steps to insulate itself from the cyclical nature of the energy patch.

Helicopters are complex machines that require considerable maintenance; operating them is a notoriously capital-intensive activity. To free up cash returns to shareholders, Bristow over the next few years will expand its leasing program to encompass up to 30 percent of its fleet.

Bristow also emphasizes longer-term customer contracts that allow it to pass along surcharges for fuel and maintenance, which protects the company’s bottom line from spikes in overhead.

Moreover, it’s common practice for Bristow to rebuild a helicopter two or even three times, which means any given machine in the field can offer up to three decades of high-margin operation.

Bristow updated its fiscal year 2013 guidance, to between $3.60 and $3.85 in EPS. Wall Street consensus calls for Bristow to post $3.52 in EPS for the current fiscal year.

With a forward price-to-earnings (P/E) ratio of 13.95, Bristow’s stock is reasonably valued considering its growth prospects. As the energy patch continues its dogged search for remote offshore reserves, this helicopter stock will continue to gain altitude.

John Persinos is managing director of Personal Finance and its parent website, Investing Daily.