Large O&G Helicopter Operators – Is 2019 the danger zone?
“The danger point in any cycle is not when you’re at the top or the bottom, but when you’re just at the inflection point,” says Clark McGinn principal at Uplifting Advice and formerly head of sales at Waypoint.
The large oil-and-gas helicopter operator market finds itself firmly in that danger zone.
A number of negative announcements from leading operators like Bristow Group during the early stages of 2019 have eroded confidence in the amount of time firms have to overcome their respective challenges.
As such there is mounting speculation that the end result over the next 12 – 18 months may be multiple Chapter 11s, a tough funding environment and potentially M&A activity analogous to the North American airline market at the turn of the decade.
Running out of time
On 11 February, Bristow Group informed the SEC that it would be late filing its Q3 2019 results due to concerns over its internal financial reporting controls stretching back to 31 March 2018.
The operator noted that an evaluation of its internal controls may result in its considering its ability to continue as a going concern.
On the same day Bristow also announced the cancellation of its Columbia Helicopters deal and that its incumbent chief Jonathan Baliff will retire on 28 February.
PHI Helicopters is also facing pressures as a maturity payment on a $500 million note is due 15 March.
“When discussing the big North American operators with institutions investing in or contemplating investing in debt and equity securities, PHI seems to be considered the most likely to file for Chapter 11 simply because they are running out of time to secure the funds to repay their $500 million notes maturing in mid-March or to reach an agreement with noteholders in time to file and complete any amendment granting relief,” David Fowkes, managing director, Imperial Capital says.
“Now they may well secure an extension, but if they don’t, it may be difficult for them to raise the necessary monies in time. That’s not to say they won’t — they may well do but it certainly looks like a case of beware the Ides of March for PHI,” he adds.
According to SEC filings, PHI had not asked for an extension as of 18 February.
Though other operators may not be facing such a tight deadline to resolve their respective issues, they might not have as long as many had assumed.
“And with the many recent developments announced by multiple operators, many are starting to believe the runway they thought the operators enjoyed just a few weeks ago may be much shorter than almost anyone believed,” Fowkes notes.
Cost cutting in the short term will be therefore necessary for the large oil-and-gas helicopter operator market to start to tackle its problems, market observers agree.
Ed Washecka, chief at Race Aviation Partners, thinks the larger operators may be experiencing a hangover from the good times.
“One of the fundamental problems in this market is operator scale, but not in the way people are used to thinking. Many of the large operators have cost structures based on the good times when being global was thought to be valuable,” Washecka says.
“Many have significant infrastructure costs they don’t need, or large overheads designed for a more-robust global market — extensive supply chains, massive hangars and MRO capabilities, and labor wage scales that exceed their smaller, localized, and more nimble competitors.”
The pressures operators are currently under may result in fundamental changes to what an operator looks like.
One solution being touted is for the major operators to learn past lessons from their airline counterparts and seek M&A opportunities.
“Consolidation or rationalization may be the ultimate end game of the situation we see right now. It’s almost analogous to the North American Big Four airlines. Prior to the multitude of US airlines serially restructuring, combining and consolidating, their results were often dire and we saw literally hundreds of fixed wing US bankruptcies filed over a 40-year period,” says Fowkes,
“But over the past decade, once consolidation and rationalization had run their courses, the remaining US airlines have been the most consistently stable and profitable carriers globally.”
Franchising may also may be an option that is pursued. One advantage of this approach is that for global operators it circumvents complications and costs regarding world-wide operations, such as local registration of helicopters.
However, any industry consolidation is unlikely to occur until either multiple Chapter 11s are filed or investor concern over the health of operators abates.
Investors and banks may not exhibit much sympathy in the meantime, raising a real possibility that funding may dry up.
Funding gap in 2019?
There are some concerns that funding will become increasingly difficult to obtain in 2019.
“Despite a recent debt deal announced by LCI, some are worried about the availability of debt capital” notes Washecka.
The poor performance of helicopter operator issued notes, bonds and equity in secondary trading could diminish the volume of institutional money willing to invest, according to David Fowkes.
“This, combined with the significant losses dozens of institutional lenders are realizing in the Waypoint chapter 11 process, may well scare institutional capital sources away from the helicopter space in the immediate future,” Fowkes adds.
McGinn is of the opinion that poor secondary market trading may make bank credit officers more wary of the space as well, potentially creating a funding gap.
However, this is not a certainty, according to McGinn.
“But equally it might just be a value play on those notes by traders and the after effects of that approach would be limited.”
Whether a funding gap does emerge in 2019 remains to be seen, but even if financing remains available, helicopter operators’ cost of debt will likely rise given current conditions.
The helicopter business is a cyclical one, and opinion is split if the market is bouncing along the bottom or just about to take a swing upward.
But though North American oil-and-gas helicopter operators are facing headwinds, the market they operate in is fundamentally sound and is showing signs of rebounding from a downturn that began in 2016
“The big oil companies are starting to do a bit more exploration, and unions are looking for more-favourable rotas and of course helicopters are mission critical for that industry. While the large oil majors have been tight on costs, a Shell representative recently told a conference they had tightened costs too much,” says McGinn.
The next year or so will be tough for operators, but pruning costs and readjusting now will leave them in good stead for 2020 and beyond.
“There will be pain in 2019, but it will be good pain as firms take the necessary cost cutting steps to move forward,” says McGinn.