Helicopter Operators Profit in Offshore Drilling Rise
A pickup in offshore drilling is swelling the orderbooks of the handful of helicopter operators that shuttle oil workers to and from remote rigs. Their stock prices, depressed after Big Oil's recent spending cuts, could also be readying for take-off.
Bristow Group plans to invest $1 billion this year to procure just some of the 300 new helicopters that Barclays estimates will be needed by the oil and gas industry over the next five years.
"We will invest more in this one year than in the last two-and-a-half years combined," said Jonathan Baliff, the chief financial officer of Bristow who will take over as CEO on July 31.
"To invest a third of our market capitalization in one year is one way of saying we are optimistic of the future."
With a market value of $2.7 billion, Houston-based Bristow is the largest of the niche group of companies that supply helicopters to the oil and gas industry and, increasingly, for search-and-rescue missions.
As oil majors such as Exxon Mobil Corp and Royal Dutch Shell have announced spending cuts after years of double-digit percentage growth, investor appetite for auxiliary services has waned.
Bristow's stock has fallen 6 percent in the last six months. Shares of Era Group, a competitor, have fallen 11 percent, while CHC Group has lost over a quarter of its value since its shares were floated in New York in January.
But these dips could make the stocks a shrewd buy, Thomson Reuters data shows. Analysts point to renewed appetite for drilling in the Gulf of Mexico, West Africa and the North Sea after a lull that followed the Gulf of Mexico oil spill in 2010.
Bristow should be trading at $94.77, a 25 percent premium to Monday's close of $75.54, according to StarMine's Intrinsic Valuation model, which takes analysts' five-year estimates and models the growth trajectory over a longer period of time.
Anthony Walker, a vice-president at Ariel Investments, said Bristow's geographic reach and focus on deepwater drilling made the company "disproportionately" poised to benefit from the delivery of offshore rigs in the next three to five years.
Ariel, a Chicago-based investment firm, owns 9 percent of Bristow, making it one of the company's largest shareholders.
Technological advances are making offshore drilling more cost-efficient, reversing a decline in production and potentially rivaling shale hot spots such as Texas's Eagle Ford formation in terms of growth.
Gulf of Mexico oil production, which has fallen for four consecutive years, is expected to increase by 150,000 barrels per day (bpd) in 2014 and by an additional 240,000 bpd in 2015, according to the U.S. Energy Information Administration.
"A lot of the expected growth in global oil production over the next 10 to 20 years is expected to come from deepwater," said James West, oil services and drilling analyst at Barclays.
Barclays forecasts a 6 percent rise in global oil and gas exploration and production spending this year. By 2016, it expects about 300 deepwater rigs to be in operation worldwide, 25 percent more than today.
Bristow's $1 billion investment this year, about triple its usual budget, will go toward the procurement of 47 helicopters, enough to boost the size of its fleet by 17 percent.
Derek Maupin, analyst at investment advisory Hodges Capital Management, which holds Bristow shares, said higher demand for helicopters was not contingent on more exploration. Existing production rigs would supply most of the revenue for Bristow, he said.
Helicopter operators are also winning business in the search-and-rescue field, picking up contracts as governments cut their coastguard budgets. Bristow, for example, last year won a 1.6 billion-pound ($2.7 billion) contract to run Britain's search-and-rescue helicopter services for a decade from 2015.
"We are seeing more and more interest, with oil and gas operators actually putting search-and-rescue portions into crew shuttling contracts," CHC Group CEO William Amelio told Reuters.
CHC has ordered 33 new helicopters and Era 20 from companies such as United Technologies Corp unit Sikorsky Aircraft, UK's AgustaWestland NV and Eurocopter. The orders will increase their fleets by 14 percent and 12 percent respectively.
Of nine analysts that cover both Bristow and CHC, most have a "buy" rating on both stocks and none recommend selling either, according to Thomson Reuters. All three analysts covering Era have a "buy" or higher rating on the stock.
Era should be trading at $33.09, a 14 percent premium to the stock's Monday close, according to StarMine's Intrinsic Valuation model. ($1 = 0.5962 British Pounds)
By Swetha Gopinath (C) Reuters 2014.
Picture Credit: Jill Friedman