Thursday, August 10, 2017

ERA Group Pitching a Good Game

Asset prices in the US are pretty high at the moment, except for those related to oil and gas, which is one of the few depressed sectors. ERA Group (ERA) owns and operates helicopters that transport personnel to offshore oil platforms. That description is enough to turn off any mainstream investor who has read a newspaper in the last three years, which is what attracts me to the situation.

ERA trades at a 60% discount to book value, as revenues for offshore exploration and other oil and gas customer non-necessities have dried up. Impressively, however, the company has been able to generate cash as of late. On a market cap of $190 million, so far this year the company has generated $13 million in operating cash flow, while spending only $7 million in net equipment over the same period and with spending commitments going forward of only $5 million.

Business appears to be picking up as well, with management stating this week that, “For the first time in a long while, we are experiencing an increase in customer activity in our U.S. oil and gas operations, beginning in the third quarter of 2017, which is expected to result in higher utilization of the existing contracted fleet as well as additional helicopters being placed on contract."

I have no idea if this pick up will last past this quarter, but one doesn't have to count on it. Most of the company's debt is not due until 2021, though there is a $67 million payment due in 2019. Eventually, the oil and gas market will return, as wells are depleting at a faster rate than new ones are being found, thanks to the price. On that topic, I found this chart interesting:

ERA has been successful at reducing its assets as demand has slowed. Lighter helicopters in particular have alternate uses, which has allowed ERA and the rest of the industry to reduce capacity. Last quarter, the company generated gains of $5 million on asset sales.

It's worth noting that one class of helicopter that the company owns (with a book value of $156 million) was involved in a crash unrelated to the company. As such, all of these have been grounded for some time, and steps will need to be taken before the market regains confidence in these Airbus models. Even if one counts these at half of book, however, ERA still trades at a 50% discount to tangible book.

If you like this idea but find the equity too risky, you may instead be interested in the company's debt. The bonds trade at a yield of almost 11% despite some generous asset coverage. For me, the equity is too risky as a full position (commodity industry, commodity company etc), but works as part of a basket of similarly risky equities where the chance of loss for any one security is higher than I'd normally accept, but where the upside likely more than compensates for this risk in my estimation.

Disclosure: Author has a long position in shares of ERA


Dean said...

have you looked at HNZ in Canada. Similar story.

Igor said...

Do you happen to have a link where I could find some description of that graph? I'm a little confused why the level of inventories in the end of 2016 is not the level in the beginning of 2017.

Saj Karsan said...

Hi Dean, I just haven't seen HNZ turn the same cash flow and have the same discount, which has kept me on the sidelines.

Hi Igor, good observation. Here's where I got the chart from:

Patrick Petermeier said...

Hi, what do you think about Bristow Group? Patrick

Philbert said...

Senvest Capital owns Bristow Group. In fact they mention the company in their recent quarterly report.

Saj Karsan said...

I don't love Bristow's persistent negative cash flow and large debt situation.

That said, the whole space seems undervalued so if there's any pickup in the commodity price I'd expect all of them to do well.

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