You could get a barrel of West Texas Intermediate oil on Wednesday for just $44.66 (although what anyone would do with one barrel – or enough to fill 3.5 ten-gallon hats – is a mystery). This is the lowest price for six years and shows a fall of about 60 per cent from last summer.
In their analyst calls, Bristow, CHC and Era Group have all talked about whether it will be a U-shaped recovery or a V-shaped one. Of course no one knows. So sensibly, they are preparing for a U and hoping for a V (hopefully we will get a square root √).
While exploration accounts for less than 25 percent of their business, oil companies are also looking to cut production costs by asking operators to find savings and negotiate contracts.
There is little sign of a rebound in oil prices yet. US oil production has not yet fallen and the amount of oil stored in the US continues to rise. Yesterday, Ali al-Omair, Kuwait’s oil minister, told Reuters: “Within OPEC we don't have any other choice than keeping the ceiling of production as it is because we don't want to lose our share in the market."
Every downturn is different – and OEMs and operators are clearly in it together – but it will be interesting to see if leasing companies can give smaller operators more flexibility.
West Texas Intermediate futures for April are at $43.9 a barrel. The August future is now at $50.
CHC cutting costs
Continuing on oil, CHC’s third quarter call was far more depressing than Clark McGinn’s (its former head of asset finance’s, now gardening before moving to Waypoint) presentation at Helicopter Investor London 2015 last month. The operator is cutting costs and looking to boost its capital efficiency.
Karl Fessenden, CEO of CHC, said there have been lots of delays and cancellations on the exploration side. Although he stressed that 80 per cent of CHC’s flights are supporting production rather than exploration.
CHC Group had revenue of $415 million and a net loss of $465 million for its fiscal 2015 third quarter, which ended January 31, 2015.
Sales fell by 2 per cent in real terms (or 9 percent including currency changes). CHC had an adjusted loss of $30 million, when special items of $442 million (which includes $404 million of goodwill). Adjusted EBITDAR – which includes lease rentals - was $115 million and was up in real terms when currency changes are excluded.
Joan Hooper, CFO of CHC, said they are expecting to take seven new helicopters in their 2016 fiscal year (which starts on 1 May this year) out of their firm orders for 19 helicopters.
Hooper discussed helicopter finance several times. CHC has recently had its fleet valued at about $3 billion. Some 80-85 per cent of these helicopters are leased. This many, however, may change said Hooper: “We’re just in throes of doing that in terms of what is the right mix of owned versus leased over the next several years.
“How do we refinance aircraft from a lease cost? Is there other ways to finance aircraft other than the same, so are there other debt related searches that might be cheaper than leasing. We are going to look at all those options to lower overall cost of capital and lower our fixed charges.”
CHC has bought back debt and estimates that this will save it $20 million a year in interest costs. Hooper also thinks they can get lease rates down.
“Lease is probably okay other than I mentioned, we are going to really look to find ways to actually lower the lease costs,” says Hooper. “We believe there is excess capacity in the lease financing market and so we're going to be talking to the lessors about coming up with a book of business that’s attractive to them and if we can refinance that at attractive rates we will be looking to do that.”
A great year(a) for Era
Chris Bradshaw, CEO of Era Group, was slightly more bullish (as was Jonathan Baliff at Bristow last month). Era had a record year in 2014 when special items for 2013 are removed.
ERA Group had net income for its fourth quarter, ending December 31, 2014 of $3.2 million on operating revenues of $74.7 million. It reported net income for its 2014 of $17.1 million, on operating revenues of $331.2 million compared to net income of $18.7 million on operating revenues of $299.0 million in the prior fiscal year.
Its 2014 EBITDA was $85.9 million compared to EBITDA of $93.1 million in the prior fiscal year – but 2013 included gains on asset dispositions and special items. Adjusted 2014 EBITDA was $84.7 million compared to $77 million in the prior year.
Era made a $6.1 million gain selling helicopters in 2014 compared to $18.3 million in the prior year.
Bradshaw estimates that 75 per cent of its business comes from production support, pipeline operations, transporting US Government inspectors and dry-leasing.
Era is waiting for its first four AW189s (it is the North American launch customer) and its first S92 comes in August. It says it has already placed all of these and two more S92s. In total, it has firm orders for 19 helicopters: 10 AW189s, four S92s and five AW169s.
He said: “The biggest driver of Era’s record profit was demand in the Gulf of Mexico” and Bradshaw is still bullish. “I would certainly note that relative to a lot of the other oil and gas markets around the world the Gulf of Mexico is a relative bright spot. The current floating rig count in the Gulf of Mexico today is about 43, which has held-up pretty well, it's actually up from about 38 at mid-year 2014 and about 36 at the end of September 2014.”
Bradshaw is also upbeat about Brazil…
While everyone is being depressed about oil prices, operators are eagerly awaiting news from Petrobras. The latest bidding round closed at the end of January.
In its latest analyst call, Bradshaw said Era Group was the lowest bidder for four AW139 helicopters with contracts scheduled to start in the first quarter of 2016. It also said it won a bid for four heavy aircraft (three of these are renewals). Unusually for Era – which likes owning aircraft – it is considering sale and leasebacks.
CHC was more circumspect. With Fessenden saying: “I would just say that it's too early to comment on this. It’s a public tender. It also had public challenges, which are in the public domain and so we won’t make any comments on anything until the tender has closed and those challenges have been addressed. And there have been numerous challenges frankly.”
KKR really, really like helicopters
KKR these week firmly established itself as serial helicopter investor by buying Air Medical Group.
It now owns Air Medical, has a stake in Malaysia’s Westar and a joint venture with Lease Corporation International. Air Medical Group replaces its stake in Avincis which it sold out to Babcock (now the – genuinely – catchy Babcock Mission Critical Services).
Bain Capital bought its stake in Air Medical in 2010. At the time a source told Reuters it was valued at $1 billion. Another source has told Reuters that Bain is paying $2 billion now. This sounds like a good return, although Air Medical has grown significantly since then buying at least five operators and moving into ground transportation.
At Helicopter Investor Miami 2014, Dave Hinton, senior vice president of finance and controller of Air Medical, had a great motto: “We want to be the best thing that happens to you on the worst day of your life,” he said.
We are still working on Helicopter Investor Asia 2015, which takes place for the first time in Singapore on 8 June. If you would be interested in speaking, sponsoring or attending (operators attend for free) please email firstname.lastname@example.org.
Have a great weekend,