Is Bristow Group Worth Considering After 54% Correction?

Bristow Group is trading well below fair market value, but depressed industry conditions can keep the stock sideways

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Nov 11, 2015
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Any stock that is related to the oil and gas sector has witnessed a steep decline in the last year. For Bristow Group (BRS, Financial), a provider of helicopter services to the offshore energy industry in Africa, the Americas, Asia Pacific and Europe Caspian, this has been a difficult year with the stock declining by 54%. The decline is due to impact on the company’s revenue as the offshore industry struggles. Is the company a value buy, or can investors still wait before considering exposure to the stock?

Since the objective is to analyze if the stock is attractive at current levels, I will start with the valuation. For FY16 (year ending March 2016), Bristow Group had earlier provided EPS guidance of $3.10 to $3.75. Considering the midrange of the guidance, $3.4 was the likely EPS for the year. However, on reporting 2Q16 results, Bristow Group drastically revised the EPS guidance.

The current EPS guidance stands at $1.8 to $2.4. Considering the midrange of the guidance at $2.1, the downward revision has been 39% and explains why the stock has slumped. With $2.1 being a likely EPS estimate, Bristow Group is currently trading at a PE of 14.4.

This is not expensive on a stand-alone basis but might seem to be fair valuations considering the point that industry conditions are likely to remain challenging at least through 2016. It is worth noting that Bristow Group stock touched $25.3 on Oct. 1 and has subsequently trended higher to current levels of $30.17. In my view, the stock is unlikely to witness another round of deep correction. Therefore, current levels look good for gradual accumulation.

The second valuation perspective comes from fair market value of vessels as of 3Q15. Excluding the value of leased aircraft and adjusting for PPE, debt and working capital, the fair market value of per share comes to $50.33. With the stock trading at $30.17, the valuations are certainly attractive from an asset valuation perspective.

However, this does not necessarily imply that Bristow Group will surge to $50 or above relatively soon. The recovery in stock price will largely depend on how soon the industry recovers. The reason for highlighting asset valuation is to point out that some exposure can be considered, but investors should not hope for robust near-term returns.

The reason for being bearish in the near-term is the oil price outlook and Bristow Group also estimates that oil prices can remain depressed through 2017. Recently, Statoil's (STO, Financial) CFO also opined that oil can remain around $50 per barrel until 2018. I must mention here that Statoil is a long-term value investment, and I discussed the reasons to be bullish on the stock in a recent article. Coming back to the point, depressed oil prices will ensure that the recovery for the offshore industry is slow, and Bristow Group’s key revenue driver is the offshore oil and gas market.

From a financial perspective, I see the following concern – Bristow Group’s EBITDA has declined from $240 million in 1H15 to $214 million in 1H16. More importantly, the company’s operating cash flow has declined from $101 million in 1H15 to $58 million in 1H16. If the slowdown continues, the company’s EBITDA and cash flow will continue to trend lower. I still don’t see debt servicing as a concern, but the company’s current dividend payout of $1.36 per share is likely to be impacted. However, as of 2Q16, Bristow Group still has a robust cash position of $139 million and undrawn credit facility of $176 million, implying total liquidity of $315 million.

Overall, Bristow Group has been hit hard by a steep decline in offshore industry activity, and I believe that 2016 will be another challenging year for the company. Valuation metrics indicate that the stock is fairly valued and can be considered for accumulation by investors who are willing to hold the stock for the next three to five years. However, very small exposure is advised at this time. A bigger exposure to the stock would only make sense when there are indications of sustained recovery in the energy industry.

Disclosure: No positions in the stock