Bristow Group 11.3% Yield- to-Maturity, Maturing October 2022
This week, Durig’s Fixed Income 2 (FX2) revisits 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. Our first review of Bristow Group in July 2016 showed a company diversifying income sources in response to historically low oil and gas prices. Sixteen months later, the company has just logged the first half of its fiscal year 2018 with excellent results. For its latest quarter (three months ending September 30, 2017), the company surprised analysts with better than expected results.
Adjusted EBITDA year-over-year increase of 27.5%.
Increase in liquidity of $96 million in Q2.
In response to better than expected results for the first half of its fiscal year, the company has revised its adjusted EBITDA guidance for FY 2018 from $15 – $50 million to $55 – $85 million.
Generated positive operating cash flow in Q2 of $16 million.
Bristow also took steps to streamline its operations with the sale of its two locations of Bristow Academy. Also, in response to a $130 million cost recovery from one of its equipment manufacturers and the deferral of capital expenditures, the company is projecting total liquidity at fiscal year end between $410 million and $450 million – more than adequate to repay the entire outstanding balance of these 2022 bonds. These 59-month bonds, couponed at 6.250% are currently selling at a discounted price of around 81.5, with a yield-to-maturity of about 11.5%. Considering Bristow’s excellent recent quarterly results, the company’s 2022 bonds are ideal for additional weighting in our Fixed Income 2 (FX2) managed income portfolio, the aggregated third quarter end performance of which is shown below.
An Update Since Our Last Review
In Bristow’s recently released quarterly results (Q2 FY2018), there were several key developments revealed that are definitely worth mentioning. First, in light of Bristow’s better than expected performance in the first half of FY 2018, the company has raised its fiscal 2018 adjusted EBITDA guidance to $55 million – $85 million from $15 million – $50 million. Second, the company has increased it guidance for liquidity levels by the end of its 2018 fiscal year to be in the range of $410 million to $450 million, an increase of $185 million over its August 2017 guidance. This liquidity increase is tied to the recovery of approximately $130 million from an original equipment manufacturer and the deferral of approximately $190 million in aircraft capital expenditures into fiscal year 2020 and beyond. These developments should dramatically improve Bristow’s position as well as make progress towards its FY 2018 STRIVE priorities – safety, cost efficiency, portfolio/fleet optimization, and revenue growth.
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, 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.
FY 2018 Q2 Results
Bristow’s results for its second quarter (three and six months ended September 30, 2017) surprised industry analysts. Here are some of the highlights:
Q2 adjusted EBITDA of $32.4 million, up from $25.4 million a year earlier, representing an increase of 27.5%.
A 7% increase in adjusted EBITDA for the six months ending September 30, 2017, registering at $47.6 million compared to $44.5 million for the same period 2016.
Q2 adjusted EBITDA margin was 9.0%, compared to 7.4% in the same prior year period.
Bristow had positive operating cash flow in fiscal Q2 of $16 million.
Increased total liquidity in Q2 by $96 million.
In addition to these results, Bristow made progress on its goal to optimize its portfolio of assets and equipment. The company recently streamlined its operations through the sale of Bristow Academy. Bristow will receive a minimum of $1.5 million over a maximum of four years. This move greatly consolidates the company’s operations and focus.
Continued Growth in SAR and Fixed Wing Revenues
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.
As discussed earlier, Bristow greatly increased its total liquidity in fiscal Q2. Latest figures put Bristow’s liquidity around $$342 million. In addition, the company has raised its liquidity guidance for the end of FY 2018 by $185 million, targeting to end the fiscal year between $410 million and $450 million. That amount of liquidity would easily cover the outstanding balance of these 2022 bonds.
Interest coverage is of paramount importance to bondholders as it indicates a bond issuer’s ability to pay interest on its outstanding debt. For its latest quarter (Q2), Bristow had adjusted EBITDA of $32.4 million and interest expense of $18.6 million, for an adjusted EBITDA / interest ratio of 1.7x.
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 $2.2 billion after depreciation and amortization.
The risk to bondholders is whether Bristow can continue on the trajectory it has set in the first half of this fiscal year (2018). The company admits that the first half of its FY 2018 was better than expected and is cautiously optimistic about the remainder of fiscal 2018. The company’s year-over-year adjusted EBITDA growth is encouraging as well as the fact that it is dramatically increasing its level of liquidity. With activity continuing to increase in the oil and gas sector, the company should see the number of flights / flight hours continue to increase over the last half of its FY 2018. Considering these accomplishments and forecasts, the outstanding 11.3% yield-to-maturity on these 59-month bonds does appear to outweigh the risks identified.
For its latest quarterly results (three months ending September 30, 2017), Bristow reported at least 86% of its operating revenues came from operations outside The Americas (this part of the company’s revenues also includes South America). As such, the company is exposed to the effects of currency fluctuations on its revenues (reported in U.S. dollars).
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.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Bristow logged a solid Q2, surprising industry analysts. In response to its better than expected first half of the fiscal year, it has raised its adjusted EBITDA guidance to $55 million to $85 million, up from $15 million to $50 million. It posted excellent increases in adjusted EBITDA as well as adjusted EBITDA margins. The company has outstanding liquidity, which has been increasing and is projected to reach up to $450 million by fiscal year end. With activity increasing in the oil and gas sector, this should bode well for Bristow. These 59-month bonds, with a more than competitive yield-to-maturity of about 11.5% will make a fantastic addition to our Fixed Income 2 (FX2) managed income portfolio, the aggregated and benchmarked third quarter end performance of which is shown above.
Issuer: Bristow Group Inc.
Ratings: Caa2 / B-
Yield to Maturity: ~11.31%
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