CHC Helicopter (NYSE:FLI) reported first-quarter results for 2006 last Tuesday. Earnings decreased by 18%, and brought the shares down as a result. While it is odd that a company deriving most of its revenue from the oil and gas industry would suffer from lower earnings, the current share price may offer a buying opportunity.
Growing from a small start in St. John's, Newfoundland, CHC Helicopter has become the world's largest provider of helicopter services. Its primary customers are oil and gas companies such as ExxonMobil (NYSE:XOM), Statoil (NYSE:STO), and Chevron (NYSE:CVX), who need transportation to and from offshore oil platforms and other remote production areas. Oil and gas exploration and production accounted for 81% of 2005 revenue. Additional revenue is generated through EMS/SAR (emergency medical service/search and rescue) helicopter services. Plus, in 2005, the company created its Heli-One division to provide helicopter repair, overhaul, maintenance, and logistics services for its fleet and external customers.
The skinny
In recent years, CHC has sold most of its light aircraft to focus on medium and heavy aircraft. Medium and heavy aircraft have longer range, higher capacity, and the ability to operate day or night in adverse conditions -- which makes these aircraft more suitable for serving offshore oil platforms. This puts CHC at the higher end of the business, where customers focus on reliability, safety, and logistics instead of price. Customers generally sign long-term contracts, with revenue based upon flying time -- either through a fixed fee with an hourly charge or through a straight hourly rate. Fuel prices are directly passed through to customers, so unlike transportation businesses like Southwest Airlines (NYSE:LUV) and Winnebago (NYSE:WGO), higher oil prices have not hurt CHC's results.
Getting deeper into the business, CHC boasts many characteristics that Fool co-founder Tom Gardner has identified as crucial to Hidden Gems. (Indeed, Tom's monthly newsletter service of the same name is beating the market by more than 18 percentage points.) They are:
- Devoted leadership
- A sound balance sheet
- Early dividend payments
- A wide market opportunity
- A broken stock price
The founder of CHC Helicopter is Craig Dobbin, who remains executive chairman and the largest shareholder -- holding 46.5% of shares, according to the most recent proxy. Mr. Dobbin has been with the company since the beginning and claims he will stay with it until he is "10 toes up."
The balance sheet, however, needs some work. CHC has a net debt position of $648 million (Canadian), a figure that has increased in recent years as the company has expanded its fleet. While it would be great to see a pile of cash and little or no debt, the position at CHC is not unusual for a capital-intensive business, and it certainly won't sink the company. Because of these capital expenditures, CHC also does not generate free cash flow. Nevertheless, revenue is growing, initiatives are in place to reduce operating costs, and if capital expenditures return to the historical norm, free cash flow is not far off.
CHC began paying dividends as a very small company in 1998, and its current dividend yield is 1.2%. Payments have not been reliable, however -- no dividends were paid in 2000 or 2002. But with a business model based on long-term contracts, dividends should be more consistent going forward.
Foolish final thoughts
CHC is the largest provider of helicopter services in the world -- and it has plenty of room to grow. The addition of the Heli-One segment offers additional opportunities for the company to provide maintenance and logistical services to other helicopter operators. Furthermore, high oil prices are driving the company's major customers farther offshore to build more platforms. More platforms, farther from shore, will result in more flying hours and more profits for CHC.
While the recent earnings decline is nothing to celebrate, it has created a share price near the six-month low. The million-dollar question is whether the recent investments and cost reductions will translate into higher earnings. The story will need to develop over the next couple of quarters before we know the answer, but by then the shares may no longer be available at today's prices.
On the whole, CHC has more characteristics of a Hidden Gem than the other companies I've profiled in the oil and gas industry -- and that's good. The companies that have made the Hidden Gems cut have compiled 28% average returns since July 2003 -- beating the market by 18 percentage points. If you'd like to take a look Tom Gardner and his team's more than 40 active positions, take a 30-day free trial to the service. There is no obligation to subscribe, and you'll enjoy access to everything the archives have to offer. Simply click here to learn more.
Robert Aronen does not own shares of any of the companies mentioned in this article, and he's never been to Newfoundland, eh. The Motley Fool has a disclosure policy.
