Here’s an idea that’s meant for trading enthusiasts, especially those who are interested in more speculative trades, based on our previous presentation of Era Group
(in September last year).
In the long term, the investment thesis for Era hasn’t changed a bit - our previous article gives a detailed overview of the opportunity and the risk profile. In the short term, there potentially is an interesting gain to be captured during the publication of the company's next quarterly earnings report, scheduled for the 1st of May.
Despite a slight increase in the price of the share since September, Era continues to trade at a significant discount of the actual value of its assets - in this particular case one of the biggest helicopter fleets in the world, as well as a brand new helicopter base in Louisiana.
In its most recent shareholder presentation
, the management of the company told us that an independent research firm has estimated the net value of the assets (once all of the payables and receivables have been taken into account) at $25 per share, in other words, 2.5 times more than the price of the share ($10) at the time when this article is being written.
While the market conditions in the Gulf of Mexico - which is where the offshore drilling activities got jammed following the fall of the price per barrel - remain difficult, Era hasn’t lost any cash in 2017 - a remarkable achievement. Better yet: the business activity has a positive cash flow (of $20 million), which largely covers the company’s investment needs ($10 million).
The company has also managed to refinance its credit facility until 2021 (something the author had no doubt about) while staying admirably opportunistic in its capital allocation: the disposal of unprofitable assets, the sale of helicopters for a satisfying price, the repayment of the debt, cost control, etc.
With $100 million of available cash and no long-term financial engagement the flexibility of the company remains satisfying and allows it to deal with a period of prolonged stress.
This is by the way where we see a modest start of a recovery in the offshore sector - the WTI trades at a price that is a little below that of the Brent, but if the upward trend continues on a global level the days ahead are starting to look better in the United States.
The financial leverage also remains reasonable: on paper, the debt of the company represents a quarter of the value of the fleet; pro forma, the proportion is possibly less because, so far, the helicopters are systematically sold with a profit compared to their book value.
The interest coverage, however, stagnates at a critical level, since the cash flow before taxes and interest - or EBITDA - of $25 million painfully covers the $16 million of payable interest.
In short, the discount on the share price remains considerable (between 50 and 60% of the net asset value) in a market context that will undoubtedly get better over the next months - that is if the oil price doesn’t tumble again.
This is why any pleasant surprise on the first of May should significantly boost the share price. In case of a disappointment - meaning a status quo and the pursuit of an activity that’s slowed down - the risk seems correctly controlled, thanks to the considerable security margin between the share price and the net asset value, on top of the comfortable liquidity buffer that’s available.
This way it could make sense for those who like this kind of situation, to want to capture a short-term gain. The author is a shareholder of Era Group (at an average price of $8,55) and intends to stay one for the next years.
Translated from the original article
Article published on 04/25/2018 | 17:36