This week, we review a company providing aviation services for the oil and gas industry as well as search and rescue operations for government and civil organizations across the globe. Bristow Group (BRS) has issued a 77-month bond currently yielding 11%. The company recently reported on its Q4 and FY 2016 results, which illustrates its shrewd business strategy in addressing the nearly two-year decline in oil prices.
Bristow Group has outstanding interest coverage of 4.2x for its FY 2016, which is even more impressive given that many of its largest clients (oil companies) were enduring oil prices at $26 / barrel in January 2016.
In Q4, Bristow’s efforts to diversify its revenue sources have shown great success, with nearly a third of its revenues coming from non-oil and gas sources.
Bristow Group has also reduced costs, with general and administrative costs coming in almost 12% lower in FY 2016 than in FY 2015.
The company has significant asset value in its helicopter and fixed wing fleet, currently valued at $2.3 billion.
Bristow’s revenue diversification and cost reductions have provided a new focus for this established aviation services provider. With an excellent 12% yield and a reasonably length maturity in just over 6 years, we think these nicely discounted bonds from Bristow Group provide excellent diversification for the high yield fixed income investor and will make an excellent addition to our FX1 and FX2 global fixed income portfolios.
About the Issuer
Bristow Group is the leading provider of industrial aviation services offering exceptional transportation, search and rescue (SAR) and aircraft support services, including helicopter maintenance and training, to government and civil organizations worldwide. With headquarters in Houston, Texas, Bristow has major operations in the North Sea, Nigeria, the U.S. Gulf of Mexico, and in most of the other major offshore oil and gas producing regions of the world, including Australia, Brazil, Canada, Russia and Trinidad. Bristow provides SAR services to the private sector in Australia, Canada, Guyana, Norway, Russia and Trinidad, and to the public sector for all of the UK on behalf of the Maritime and Coastguard Agency.
Bristow’s operations are organized into four regions around the world: Africa, Americas, Europe Caspian and Asia Pacific. The company is targeting the growing demand for reliable, integrated aviation services by providing fixed-wing with rotary-wing flight connectivity in the UK, Australia, Brazil and Africa, to offer convenient point-to-point scheduled and charter transportation services to clients transferring workers offshore. Bristow’s SAR capabilities and aviation training solutions are unmatched in the industry.
A majority of Bristow’s revenues comes from the aviation services they provide to large oil and gas companies. Since oil started its steep decline in mid-2014, many U.S. oil and gas companies producing oil through fracking have struggled to stay solvent amidst falling revenues and profits, as production costs from fracking are higher than traditional drilling. However, Bristow’s clients are the large, multi-national oil exploration and production companies, like Chevron and Conoco-Phillips. Many of these companies produce oil at a cheaper cost than companies involved in fracking. So, although Bristow has seen some reduction in its revenues due to its client companies being more judicious in their use of Bristow’s services, they remain a vital part of the oil companies’ operations. More importantly, Bristow is not exposed to the more volatile market of oil from fracking operations.
Adding Diverse Revenue Sources
In its Q3 quarterly earnings statement, Bristow broke down its revenue sources as follows: 79% from oil and gas operations, 9% from Search and Rescue (SAR) and 12% from fixed wing services. The company has been proactive in its approach to continue diversifying its revenue sources in order to address the effects of the reduced spending of its oil and gas customers. Those steps include winning the contract to provide civilian search and rescue for the British Coastguard and acquiring Airnorth of Australia.
’s contract with the government of the United Kingdom was signed in 2013, with a phase in period beginning in April 2015 and running through 2017. The company expects this agreement will generate revenues of approximately $2.5 billion over the life of the contract. As scheduled, the U.K. contract took effect beginning April 2015. In its FY 2016 Q4 results (ending 3/31/2015) operating revenue from SAR operations increased by $51.1 million or 463% compared to the same period in the previous year.
In February 2015, Bristow Australia acquired an 85% controlling stake in Airnorth, the largest regional airline in Northern Australia. In November 2015, Bristow acquired the remaining 15%.
This acquisition has significantly increased Bristow’s fixed wing revenues. For the most recently reported quarterly results, fixed wing revenues contributed $53.6 million, a 27.4% year-over-year increase. For the FY 2016 (ended 3/31/2016), fixed wing revenues totaled $208.5 million, a 33.5% increase over FY 2015.
The goal of adding diversified revenue sources is succeeding. Bristow Group recently reported its Q4 and FY 2016 results. For the FY 2016, fixed wing and U.K. SAR revenues made up 23.7% of total operating revenues, as compared to 11.9% in FY 2015. More striking is the quarterly percentages for Q4 revenue sources, with a full 31% of operating revenues coming from fixed wing and SAR operations combined.
Bristow Group has been successfully reducing its operating expenses in light of decreased spending from its oil and gas client companies. One of the components of this has been reducing its global workforce. These effects can be seen in the company’s reduced general and administrative costs (G & A). For the company’s FY 2016, G & A costs were $224.6 million compared to FY 2015’s costs of $254.2 million, an 11.6% decrease. For Q4 (ended 3/31/2016), G & A costs decreased from $59.5 million to $50.3 million, a 15.4% decrease. Bristow’s attention to cost reductions and increasing efficiencies are reflected in its most recent reported results. For FY 2016, total operating revenues had only decreased by 5.6% from FY 2015 ($1.63 billion versus $1.73 billion).
Bristow Group and Oil Prices
Although Bristow’s revenues are not directly affected by the volatility in oil prices, the almost two-year steep decline in the price of oil has affected the amount of money spent on its services by its client companies, which are primarily large oil and gas exploration and production companies like Chevron, Conoco Phillips, and Statoil. While most agree that oil bottomed out this past January, with oil at around $26 per barrel, there is little agreement on how quickly prices will recover. However, just this past week, oil finally reached the psychologically significant level of $50 per barrel, with growing confidence that a steady price rally might be sustained through the end of 2017. This would most likely spell relief for Bristow as oil companies will begin to loosen the strings on expenses.
Bristow has significant value in its property and equipment, which is mainly comprised of its fleet of helicopters and fixed wing aircraft. In its latest quarterly statement, these assets were valued at $2.3 billion after depreciation and amortization.
Bristow has strong interest coverage as well. For FY 2016, when omitting the $55.1 million impairment charge as well as the $136.8 million depreciation charge (non-cash), the company had operating income of $151.1 million and interest expense of $35.8 million, resulting in an interest coverage of 4.2x.
A key point in Bristow’s most recent quarterly results was the increase in the company’s liquidity over the previous quarter. As of 3/31/2016, Bristow recorded a total liquidity of $359.7 million, an increase over the previous quarter of 20.2%. This liquidity level includes a cash balance of $104.3 million.
The default risk is Bristow Group’s ability to perform. In light of the extended downturn in oil prices, the company has made significant progress in reducing its costs. In addition to this, its efforts to diversify its revenue sources has proved successful, with nearly a third of its revenues coming from non-oil and gas sources in its most recent quarterly results. With oil making cautious progress towards more sustainable pricing levels, Bristow should begin feeling relief in the form of increased spending from its oil and gas clients. The high 12% yield indicated with these reasonably lengthed (77 month) bonds appears to outweigh the risks identified here.
In its FY 2015 report, Bristow reported 90% of its operating revenue came from operations outside the United States. As such, the company is exposed to the effects of currency fluctuations on its revenues (reported in U.S. dollars). In its latest financial results. For FY 2016 (ended 3/31/2016), the impact of foreign currency exchange rates lowered net income by $26.6 million.
Bristow strives to maintain a flawless safety record. However, on occasion, accidents do occur. When this happens, it can affect revenues during the period immediately following as investigations are conducted to ensure the continued safety of Bristow’s crews and customers.
Summary and Conclusion
Bristow Group has been effectively navigating the extended downturn in oil prices since mid-2014. The company has successfully integrated diverse revenue sources in order to provide a cushion to the reduced spending of its largely oil and gas related client companies. The result, in its most recent reported quarter, was nearly a third of the company’s revenues being derived from non oil and gas revenue sources. In addition, Bristow has smartly reduced its expenses, shaving off almost 12% of its G & A expenses in FY 2016. While the price of oil continues its steady recovery, Bristow has ensured its long-term viability by securing revenue sources outside the oil and gas industry as well as its reduction in operating costs. These 77-month bonds, couponed at 6.25% and currently indicating a very attractive 12% yield, will dwarfs the current U.S. Treasury Yield for 5 year and 7 year treasuries, which are at 1.35% and 1.65% respectively. With Bristow’s successful revenue diversification and cost reduction, these bonds will make an excellent addition to our Fixed-Income1.com and Fixed-Income2.com global high yield income portfolios.
Issuer: Bristow Group Inc.
Ratings: B1 / B+
Yield to Maturity: ~12.05%
About Durig Capital
At Durig Capital, we provide investors with a specialized, transparent fiduciary service at a very low cost. To obtain higher yields and keep costs as low as possible, we typically bundle smaller retail orders into larger institutional sized orders with many global trading firms and bond platforms. Our professional service enables access to a greater spectrum of bonds, higher yields, and lower price points. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured.
We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful. Our main priority is to provide the best opportunities for our clients. Our bond reviews are published on the Internet and distributed through our free email newsletter to thousands of prospective clients and competitive firms only after we have first served the needs of our clients. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients.
When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.
Disclosure: Durig Capital and certain clients may have a position in Bristow Group Corporate bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.
To know more about this Bristow Group bond call our fixed income specialist at 971-327-8847
Tell us what your looking for, or if you have questions about US bond.