Era Group Inc. (ERA) is a solid secular growth story given its strong fundamentals and aggressive growth plans. With drilling activity picking up pace, the company is well placed to capitalize on the "deepwater era" as described by fellow Fool Casey Hoerth.
The deepwater era
It's no news that oil drilling is going deeper and further offshore -- as the thirst for oil remains unabated, the search for new deposits must continue. The thing with deepwater basins is that they are unexploited and may hold substantially more deposits than those onshore or near shore. Of course, this is the promise that makes deepwater more exciting to oil players despite technical and logistical challenges.
As the rigs get into deeper and deeper water, the role of helicopter operators, such as Era, that transport personnel and supplies to offshore oil and gas drilling rigs and platforms, becomes more and more important. What does it mean for Era? Solid growth. In the most recent quarter, the company reported a 36% year-over-year increase in its Gulf of Mexico operations (comprising 62% of total revenue).
Financial muscle for growth
Era's growth story is supported by its substantial fleet of 165 helicopters and an order book of 20 more to be delivered over the next five years. Additionally, the company has an option to order another 19 helicopters. The industry is capital intensive, and it requires some serious capital expenditures to purchase and maintain a fleet of helicopters.
Era continues to report positive cash flow from operations and comfortably services its debt -- it's interest coverage is 5.3 times, and total debt to capital is 39%). The company also recently amended and increased its revolving facility from $200 million to $300 million. While FCF remains negative due to significant investments in its fleet, Era has adequate financial flexibility to fund the next level of growth through internal sources as well as debt.
Competitive pressures?
Global expenditure on offshore helicopter services is forecast at $24 billion over the next five years, 57% higher than the last five years. The optimism is ratified by the number of new entrants in the industry over the last few years, with the most recent in 2013 -- Macquarie Rotorcraft. But, there seems space for everyone at the moment.
Bristow Group (BRS) has a significantly larger fleet (494 helicopters) and a larger global presence than Era. While Era is also present in many international locations, a significant aspect of the company is its contract-leasing model which is more profitable than the traditional operating model. Given that the oil exploration and production companies are responsible for all the costs involved with flying, including volatile fuel expenses, in effect the model allows Era to explore new markets with relatively lower risk while generating cash flow.
PHI Inc. (NASDAQ: PHII), which provides services only in the Gulf of Mexico, has a comparatively less resilient business model. Era has other uses for its helicopters beyond the hydrocarbon industry and offers full-service search and rescue and emergency medical services, flight-seeing tours in Alaska, and air medical services across the country. Search and rescue revenues increased 88% year over year in Q1, reflecting the high growth potential of the sub-segment. While these independent service lines cumulatively represent less than 50% of total revenue, they provide adequate operational flexibility and diversification which is not the case for PHI.
Worthy of investment?
Era Group stock has moved higher over the past few weeks on account of positive attention from hedge funds as a number of them increased or took new positions in the company. However, it still trades below its net asset value of $33.54. While the price to book value is the appropriate metric for capital intensive companies, it is a historical value and does not reflect the current value of the assets. Net asset value is calculated as the current fair value of the fleet (owned) less any debt, and provides a better picture of the value of the assets. Era looks undervalued based on its NAV and has upside potential on the back of a growing oil&gas industry.{sfr%}
