This week, we take our second look at a helicopter company who provides services to the oil and gas industry as well as air medical services to hospitals around the country. PHI Inc. was built on providing transportation to and from oil and gas platforms in the deepwater drilling areas of the Gulf of Mexico. Since the downturn in oil began 18 months ago, the company has experienced the effects of this on its main revenue stream. However, the company has smartly transitioned aircraft to its Air Medical segment to take up the slack left by reduced demand for its services from oil and gas customers. In its latest reported quarter, PHI’s Air Medical segment provided 40% of the company’s total revenues. Even more impressive is that the net profits generated by the Air Medical division are sufficient to service all of the company’s long-term debt. Additionally, the company’s unencumbered helicopter fleet has a net value over $800 million. These two facts should encourage current and potential investors of these 37-month bonds, currently selling at a discount and yielding 12%. PHI continues to be profitable even as its main revenue source is challenged. In light of these factors, we have marked these bonds for additional weighting in both our FX1 and FX2 income portfolios.
About the Issuer
Founded in 1949 and based in Lafayette, Louisiana, PHI’s primary business is the safe and reliable transportation of personnel and, to a lesser extent, parts and equipment, to, from and among offshore platforms for customers engaged in the oil and gas exploration, development, and production industry. Its principal area of operation is in the Gulf of Mexico. The company also has a smaller presence in the oil and gas industry in a few international markets as well. PHI serves the biggest and well-known names in the oil and gas industry, including Shell Oil, BP America, ExxonMobil and Conoco.
PHI also provides service to the healthcare industry through its Air Medical Group. Since its inception in 1981, PHI Air Medical Group has grown from one medically equipped helicopter to over 100 helicopters with state of the art medical interiors designed. PHI Air Medical operates 93 helicopters domestically providing air medical transportation services for hospitals in 18 states at 74 separate locations. The current customer list spans the United States and includes many premier health care organizations. Additionally, the Air Medical segment also has a current contract in the Middle East to provide helicopter emergency medical services employing nine aircraft.
PHI’s third business segment is its Technical Services segment which provides helicopter maintenance and repair services for existing customers, primarily to those that own their own aircraft. These services are generally labor intensive with higher operating margins as compared to other segments.
Air Medical Adds Revenue Stability
Since our last review of PHI, the price of oil has continued to decrease. Not surprisingly, companies whose revenues are tied directly to oil exploration and production have been affected. PHI has seen the effects of this drawdown in capital expenditures from its oil and gas customers such as ExxonMobil and Shell Oil. While most agree that exploration and production will recover, the big question is when that recovery will take place. In the meantime, PHI has a silver lining in the midst of the oil storm in its Air Medical segment.
In 2014, PHI’s Air Medical segment was responsible for 36% of the company’s total revenues. In its latest reported quarter (ended September 30, 2015), Air Medical contributed 40% of the company’s total operating revenues, with over a third of this revenue (34%) coming from contracts with hospitals that generate a fixed monthly rate for aircraft availability. Additionally, as demand for its services have decreased in the oil and gas sector, PHI has been able to meet additional demand in its Air Medical division by transferring aircraft from its Oil and Gas division to the Air Medical division. Since September 2014, the company has moved six aircraft from the Oil and Gas division to the Air Medical division.
Oil and Gas Segment
Although the significant decline in oil prices has had an effect on PHI’s revenues, the company still derives the bulk of its revenues from this division (56% in Q3 2015). The good news is that PHI revenues in its Oil and Gas segment is mainly derived from contracts that include a fixed monthly rate, plus a variable rate for flight time. Also, the company has worked with some of the biggest names in oil for 30+ years – Shell Oil Company, BP America, ExxonMobil and ConocoPhillips. And, contrary to what one might think, exploration and production activity continues in the Gulf of Mexico even in the face of the oil downturn. As an example, Shell Oil recently made a 100-million barrel find in the Mars-Ursa basin in the Gulf of Mexico.
PHI continues to have solid financials. Even as the price of oil has continued to decline, the company has continued to post solid results. The company’s Air Medical segment has recovered some of the lost revenue from the Oil and Gas segment due to decreasing expenditures from oil companies in exploration and production.
In Q3 2015, revenue for the Air Medical segment increased 8.1% over Q3 2014. In addition, the Air Medical segment generated approximately 40% of PHI’s operating revenues in Q3 2014, up from 37% in Q3 2014. Air Medical’s profitability has also increased. In Q3 2015, net profit increased 14% over Q3 2014. For the nine months ending September 30, 2015, net profits increased by 20%, growing from $35.838 million in 2014 to $42.996 million in 2015. However, the most impressive statistic for PHI regarding its Air Medical segment is that the net profits generated from this division (YTD as of 9/30/2015 of $42.996 million) completely services the company’s interest expense YTD of $21.691 million. Translated differently, the company’s Oil and Gas division could completely fold and the company could still service all of its outstanding debt.
With that in mind, when one considers PHI’s total revenues, their interest coverage ratio is excellent. For the nine months ending September 30, 2015, the company had operating income of $62.508 million and interest expense of $21.691 million for an interest coverage of 2.88x.
A discussion of the company’s financials would not be complete without the mention of the value of its property and equipment. PHI owns much of its fleet of helicopters unencumbered. This translates to substantial value on its balance sheet. As of September 30, 2015, the company’s net value of property and equipment was $887.4 million. This value should serve to ease any concerns bondholders may have as it easily exceeds the company’s total long-term debt of $578.2 million. In addition to its significant value in hard assets, PHI maintains a level of liquidity through cash and a revolving credit line. At the end of Q3 2015, the company had a total liquidity of $77.3 million (71.8 million revolver and $5.5 million cash).
The default risk is PHI’s ability to perform. Although the company is primarily known for its services to the oil and gas industry, it has shown its resiliency by shifting resources to its Air Medical segment to increase revenues in that division. And although the decline in oil prices has had some effects on its revenues, YTD revenues (as of 9/30/2015) were down less than 2% over the same time period in 2014.
As the price of oil has remained depressed far longer than expected, continued low oil prices could eventually have a larger effect on PHI’s revenues as oil companies continue to reduce their exploration and production. However, as mentioned earlier, PHI produces enough revenue and profits through its Air Medical segment to service its debt. In addition, the company’s $800+ million value in its unencumbered helicopter fleet could provide additional funds if needed.
Summary and Conclusion
PHI has ingeniously reallocated assets to its Air Medical division which is thriving, even as revenues decrease in its Oil and Gas segment. The company has built its Air Medical segment to the extent that even if its Oil and Gas segment folded entirely, its Air Medical segment would still provide enough revenue and profit to service all of the company’s outstanding long-term debt. Between this and the company’s extensive value in its unencumbered helicopter fleet, bondholders should be reassured of the company’s stability. These competitive yielding, relatively short-term bonds give investors an opportunity to invest in a company that is well-managed, as well as profitable even as its largest revenue generator is associated with an industry experiencing an unprecedented downturn. We are adding the high 12% yield of these bonds to our FX1 and FX2 globvbal income portfolios. If you would like to discuss adding these bonds to your portfolio, please contact us.
Issuer: PHI, Inc.
Yield to Maturity: ~12.1%
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Disclosure: Some Durig Capital clients may currently own PHI’s 2019 bonds.
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