Bristow Group (BRS, Financial), a provider of helicopter service to the offshore energy industry has declined by 20% in the last one year. The decline in stock price has been due to lower oil prices that has impacted the energy sector and all related industries. Bristow Group currently trades at $59.50 and is an attractive long-term investment option in my view. This article discusses the reasons to be bullish on the stock.
The first reason to be bullish on the stock is the point that oil prices seem to have bottomed out. Oil has trended higher in the recent past and this is a positive development for offshore drillers. While the offshore drilling market will still take time to recover, relatively higher oil prices would ensure that industry activity does not slip further. With Bristow Group’s revenue directly depending on offshore activity, I believe that the company has bottomed out.
On May 18, 2015, Bristow Group announced a quarterly dividend of $0.34 per share as compared to prior quarter dividend on $0.32 per share. An increase in dividends is the second reason to be bullish on the stock. An increase in dividends just before the announcement of quarterly results also implies that the company is likely to report a good quarter and the stock can trend higher after results are announced today. I must add that a dividend of $0.34 per share implies a healthy annual dividend payout of $1.28 per share and a good dividend yield of 2.1%.
Another important reason to be bullish on Bristow Group is the predictability of cash flows. Looking at the company’s revenue source, 65% of the revenue comes from fixed monthly contracts while 35% of the revenue comes from variable hourly contracts. Further, 70% of the operating income is from fixed monthly contracts. Therefore, the company’s revenue and cash flow visibility is predictable and stable.
Bristow Group also has the advantage of global diversification and I believe that the company’s revenue will continue to remain diversified. The company has identified 199 aircraft opportunities globally for the next three years and with 31 high probability opportunities. If these opportunities translate into contracts, Bristow Group is likely to witness steady revenue growth in the coming years.
From a financial perspective, Bristow Group has a strong liquidity position and robust operating cash flow. As of 3Q15 the company had a total liquidity position of $412 million including $291 in undrawn credit facility. Further, for the first nine months of 2015, the company generated $162 million in operating cash flow as compared to $137 million in operating cash flow for the first nine months of 2014. I am stressing on the liquidity and the OCF to underscore the point that robust dividends will continue for Bristow Group. In addition, the company has the financial flexibility to fund growth once the offshore industry conditions improve.
From a valuation perspective, Bristow Group has provided an EPS guidance of $4.05 to $4.45 for FY15. If the mid range of the guidance is considered, an EPS of $4.25 would imply that Bristow Group is currently trading at a PE valuation of 14. In my view, these are not expensive valuations and the stock has upside in the coming quarters. While a lot depends on the offshore industry recovery, the stock is worth accumulating at current valuations.
