BORR - Bristow Group: Upgrading On Constructive Outlook And Discounted Valuation - Buy

2023-08-30 23:35:40 ET

Summary

• Leading helicopter services provider Bristow Group reported sequentially improved quarterly results mostly due to higher fleet utilization.
• VTOL reaffirmed full-year expectations with substantial, additional progress projected for next year.
• Elevated near-term capex requirements will likely prevent the company from repurchasing shares or paying dividends for the time being.
• Anticipated 2024 growth is expected to be derived from the company's offshore energy services segment which is benefiting from the ongoing recovery in offshore oil and gas exploration activity.
• Given the company's constructive outlook and discounted valuation, I am upgrading shares from "Hold" to "Buy".

Note:

I have covered Bristow Group ( VTOL ) previously, so investors should view this as an update to my earlier articles on the company.

Earlier this month, leading offshore helicopter services provider Bristow Group or "Bristow" reported sequentially improved quarterly results mostly due to higher fleet utilization:

The company generated $18.2 million in cash from operating activities and another $3.3 million from equipment sales during the quarter while capital expenditures amounted to $12.2 million. As a result, Bristow generated $9.3 million of free cash flow in Q2.

Considering only maintenance expenditures, free cash flow was positive $15.7 million. In its adjusted free cash flow calculation, Bristow also added back an aggregate $2.2 million in other special items:

Bristow continues to expect total capital expenditures of between $155 to $165 million for the new UKSAR2G contract with the vast majority expected to be incurred in 2023 and 2024.

In addition, the company will be required to invest up to $145 million for the recently awarded Irish Coast Guard ("IRCG") contract:

In aggregate, these contracts require approximately $300 million in capex investments which the company expects to finance with a combination of cash on hand, future operating cash flow, new debt and equipment leasing as outlined by management on the conference call .

Unrestricted cash of $212 million and available liquidity of $285.3 million increased quarter-over-quarter due to the above-discussed free cash flow generation. Accordingly, net debt of $356 million was also down sequentially:

Bristow continues to expect full-year revenues of between $1.20 billion and $1.31 billion and Adjusted EBITDA to range from $150 million to $170 million with further, substantial improvement projected for next year:

Please note that the company's 2024 outlook does not include material contributions from the above-discussed new SAR contracts in the UK and Ireland as very much evidenced by the projected lack of growth in government services next year.

Consequently, Bristow's anticipated 2024 growth is expected to be derived from its much larger offshore energy services segment which is benefiting from the ongoing recovery in offshore oil and gas exploration activity.

However, free cash flow generation will be impacted quite meaningfully by the above-discussed capex requirements for the new SAR contracts.

As a result, investors should not expect the company to conduct additional buybacks under its $40 million stock repurchase program anytime soon.

While the lack of near-term prospects for capital returns might look disappointing for some investors, it should be noted that Bristow's substantial investment into large-scale government contracts should provide the company with solid margins and stable cash flow contributions well into the next decade.

However, investors solely looking for exposure to the anticipated multi-year recovery in offshore oil and gas should rather consider an investment in leading offshore drillers Noble Corporation ( NE ), Transocean ( RIG ), Seadrill ( SDRL ), Valaris ( VAL ), Diamond Offshore ( DO ) and Borr Drilling ( BORR ) or offshore support vessel providers like Tidewater ( TDW ) and SEACOR Marine Holdings ( SMHI ) as well as specialty services provider Helix Energy Solutions ( HLX ).

On the flip side, Bristow's shares are still trading at an estimated 45% discount to net asset value ("NAV") and with substantial improvements in profitability expected in the second half and going into next year, I am upgrading the stock from " Hold " to " Buy ".

Bottom Line

Bristow Group reported sequentially improved quarterly results mostly due to higher fleet utilization.

With the commencement of new contracts in the company's offshore energy service segment, further top- and bottom-line progress is expected over the balance of this year and going into 2024.

While elevated capex requirements are likely to prevent the company from conducting share buybacks or paying dividends for the time being, the substantial investment in large-scale government contracts should provide Bristow with healthy margins and cash flows well into the next decade.

Given the company's constructive outlook and discounted valuation, I am upgrading shares from " Hold " to " Buy ".

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