Investment overview
Any stock even remotely associated with the energy sector has seen a sharp price decline in conjunction with muted activity in the sector. While uncertainties prevail in regard to sustained recovery for the industry, investors should focus on stocks that are trading at deep value and have decent fundamentals.
Era Group Inc. (ERA, Financial), which provides helicopter services to the offshore oil and gas sector, is an interesting stock for gradual accumulation. The stock has steeply declined by 45% year to date, but I believe the worst is over in terms of stock downside.
Due to its interesting fundamentals, Era Group is a value buy at current levels.
I must caution investors at the onset that a big exposure to the stock is not advisable. Some exposure, however, can be considered for a potentially sharp rally from oversold levels.
Balance sheet remains healthy
The first thing worth discussing is the balance sheet. Even with industry headwinds, the company is not headed for any credit disaster.
As of March, Era Group had cash and equivalents of $26.3 million and total available liquidity (including undrawn credit facility) of $147.5 million. A strong liquidity buffer is likely to ensure the company’s credit health remains resilient.
The next important point to note is as of March, the company’s total debt was $229 million with net debt of $198 million. For first-quarter 2017, Era Group reported adjusted EBITDA of $7 million, which translates into annualized EBITDA of $28 million.
While the net-debt-to-EBITDA ratio comes to 7, I do not see leverage as a concern because the company’s EBITDA interest coverage still remains at 2. This implies smooth debt servicing.
Additionally, if the industry gradually shows recovery toward the end of fiscal years 2017 and 2018, the company’s credit metrics are likely to improve.
Era Group reported operating cash flow of $4.2 million and free cash flow of $3.2 million for the first quarter. I expect the company’s operating cash flow will remain positive throughout 2017. With minimal investments in the pipeline, the company’s cash buffer will increase in the coming quarters.
While declining EBITDA is a concern, the company’s fundamentals remain strong. I expect the EBITDA will improve in the coming quarters.
Stock trading at deep value
I mentioned at the onset industry concerns prevail, but considering the stock's undervaluation, it might be a risk worth taking.
To put things in perspective, Era Group owns a fleet of 128 helicopters with an average age of 13 years. As of March, the value of the company’s assets were $811 million.
Considering total debt of $228 million and cash of $26 million, the net asset value comes to $609 million. Era Group currently trades at a market capitalization of $197 million. This suggests the stock is trading at deep value.
While this valuation consideration might be more relevant when talking about a liquidation scenario, it does provide insight on the point the stock is oversold.
Since the company’s balance sheet remains strong, it is likely the company will be boosted when the offshore industry gains some traction.
Conclusion
I would not recommend Era Group as a long-term bet, but I expect the stock to rally from deeply oversold levels, making it an intersting pick for a six to 12-month holding period.
Oil has been trading in the range of $45 to $50 per barrel. If oil witnesses upside above $50 per barrel, the stock upside could be even more significant.
Disclosure: No positions in the stock.
