Helicopter Investor newsletter: ‘The industry absolutely needs consolidation’
“The industry absolutely needs consolidation,” Clark McGinn, principal, Uplifting Advice told Helicopter Investor in response to the news of CHC Group’s acquisition of Babcock’s oil and gas business.
McGinn says there is no shortage of players or bidders, which is driving prices down. “So, consolidation means in the next bid – in the North Sea – rather than five bidders there will be four. Consolidation has to go further,” he says.
Along with the $10m acquisition, CHC will see an increase in crew transportation capacity and fleet size by about 30 aircraft across the UK, Denmark and Australia.
“You have to take a risk or get out,” he tells us. “Even on the bad predictions, we have 25-30 years of dividends coming out of oil and gas production. If your pricing is right and you can command a reasonable return on your capital, then it is still a good business.”
Air & Sea Analytics’ principal and founder, Steve Robertson agrees. “What has been a difficult story for one operator becomes an opportunity for another. They are buying at exactly the right time in the cycle,” he tells Helicopter Investor.
“CHC has made a shrewd acquisition here and in making some aircraft acquisitions over the past year, including buying out-of-use S-92s from banks that had previously taken them back,” he says.
Oil and gas hours suffered because of the pandemic; however, Robertson says flight hours and activity is coming back.
“Hours are back up to pre-Covid levels. There have been times this year when hours have been higher than pre-covid levels. In terms of new business, it has still been quite a conservative year for exploration and production [E&P] companies. There’s been a slight uplift in expenditure, probably the most prospective areas in Latin America – Brazil, Surinam, Guyana – are a real hotspot,” according to Robertson.
Babcock has been in the process of selling its oil and gas business for nearly two years now. CEO David Lockwood said it was part of a larger plan to “streamline and focus the group on our key markets” such as military and other government missions. “Divesting at least £400m of businesses will enable us to reduce complexity and increase our focus as we return Babcock to strength,” he adds.
Babcock generated a revenue of £154m for the year to March 31st. It had gross assets of £256m, net assets excluding cash of £21m and net lease liabilities of £142m.
Is this the start of further rounds of merger and acquisitions in the industry? Robertson and McGinn both think so. Certain players are looking for diversification, says Robertson. Plus, there are some interesting sectors such as offshore wind emerging.
It would be logical if private equity-owned businesses were attracted to the market. “It is perfectly reasonable to say we can expect more mergers and acquisitions in the next 36 months.”
‘The bread and butter for the helicopter business’
According to McGinn, “wind has the potential to be the bread and butter for the helicopter business”. Most companies in the sector are using boats for this, however, McGinn suggests that helicopters are significantly more carbon-friendly than the current boat offering. He says the oil and gas sector went through this transition as well.
Given the benefits of helicopters in the construction and maintenance of wind farms, they have “a very good case to be the workhorse of the wind industry”, says McGinn. “Helicopters can be extremely valuable, both at the construction phase and in the maintenance phase.”
Certainly, the big three operators are operating in the sector already, or have said they want to be in offshore wind production, Robertson tells us. And there are smaller operators entering the space as well. “It’s a pretty niche area at the moment, but it’s one where these rotorcraft companies can earn genuine green credentials.”
Then there is also the question of hydrogen and other fuels, which might propel rotorcraft by as soon as 2025. McGinn says alternative fuels will be welcome, however, their widespread adoption will be hinged on pricing and public acceptance for unmanned commercial operations.
Robertson highlights the industry should not rule out mega mergers either. The merger between Bristow and Era Helicopters, in June 2020, is one which confirmed Bristow’s status as the world’s largest operator of Sikorsky S92, AW189, and AW139 helicopters. It operates a total fleet of more than 300 aircraft and has a combined cash balance of more than $250m.
Robertson concludes: “The need for greater operational efficiency has been evident for a while, because there has been pressure on pricing to be extended in a lot of the operations. The competitive intensity has been very high in the North Sea and some consolidation has been inevitable.”