Comment: Do Bristow and PHI’s woes herald years of uncertainty for O&G operators?
Chess is arguably overused as a metaphor for business strategy, but actually is quite apt for the difficulties oil-and-gas helicopter operators find themselves facing in 2019, and which may continue for years to come.
Anyone who has played chess against a talented player will find themselves silently and inexplicably slipping from an equal position to a slightly worse one. Then the loss of a mere pawn cascades into a loss of a piece until either checkmate is declared or pieces are sent scattering across the table in pure frustration.
Right now, with Chapter 11s declared and looming, oil-and gas operators look to be only a lowly pawn down. Yet analyse their positions more deeply, and one can only conclude their positions are only set to only worsen over the next couple of years.
This will have profound effects throughout the oil-and gas operator supply chain, with lessors and lenders all perhaps becoming more cautious just as the operators are most in need of their support.
Why this evaluation? Let us turn first to where the significant operators find themselves today.
The position on the board
Bristow Group has had a rough start to the year, which recently has taken a turn for the worse. It has still to file its third quarter results for 31 December 2018 after delaying them due to concerns over “material weaknesses” in the company’s reporting.
However, it recently stated in a recent SEC filing pushing back its 10-Q filing that it is considering “several financial alternatives” to address its liquidity and to restructure its substantial debt, and that a Chapter 11 is very much on the cards.
When chief financial officer Don Miller assumed the helm earlier this year, one market analyst told Helicopter Investor that this made him think Bristow were already seriously considering Chapter 11 given Miller’s prior roles at a post-bankruptcy Enron company.
Add into this an array of lawyers targeting it for class-action law suits off the back of potentially misreporting its Q3 figures.
The stock has plummeted in turn, standing at $0.53 during 23 April trading. Contrast this stock price to the operator’s opening price of $2.77 on 2 January.
PHI’s filing for Chapter 11 on 14 March was much more expected, given that the operator was widely assumed to be – and then indeed turned out to be struggling to pay the maturity on $500 million worth of senior notes by 15 March.
Since that filing, the operator has announced plans for a debt-for-equity swap of more than $630 million in an effort to trim its liabilities.
Normally, turning to Chapter 11 or looking to restructure debt would mark the turning point when market players begin a process of recovery.
But it can be argued that Chapter 11s and restructurings today are all but a little too late for oil-and gas operators.
Fighting yesterday’s war
Arguably, the roots of today’s tribulations for the operators began a couple of years ago when the oil-and-gas market swung into a downturn.
In May 2016, CHC Helicopters was the most visible victim, filing for Chapter 11, emerging from it trimmed and scaled down.
With the benefit of hindsight, perhaps that was the ideal time for a bankruptcy, painful as it was – and for the other operators to voluntarily trim their own operations without the hassles of restructuring.
“This is all starting to look like fighting yesterday’s war today. When CHC filed a couple of years ago and cut its assets accordingly, that was the time for the other oil-and-gas operators to react and start to trim their fat and become better suited to dealing with an oil market that has proved volatile over that time period. Instead they’ve waited, hoping to trade through the bad market by price-cutting, and now are having to file or looking likely to file as headwinds hit them again.” Says Clark McGinn, principal at Uplifting Advice.
One driver behind this analysis is that the markets oil-and-gas operators target have changed in the last few years, but they have failed to adapt accordingly.
“Yes, the big operators can file and trim debt. But the same fundamental issues will remain for them in this market. There are too many operators, and as important regional markets have seen the rise of local operators — like Nigeria for instance – and margins on leases have been squeezed. But these firms are still set up for an operating environment that has now disappeared and cannot support how they operate,” says McGinn.
However, when the oil-and gas industry looked at the start of the year to be on the uptick, with exploration starting again, perhaps one could have rendered that assessment as skewing negative,
But given oil’s geo-political football status, betting that sustained boom times are a certainty looks far from a sure bet.
Indeed, President Trump’s recent pronouncements on Iran to end exemptions from sanctions for countries still buying oil from Iran may unsettle the oil market further.
So, what you ultimately have are legacy operators still primed for boom market – not the reality that confronts them today.
One solution to resolve this mooted earlier this year was for large oil-and gas operators to consider consolidation akin to North American airlines at the turn of this decade. Those airlines, such as United and American, had all suffered from poor profitability due to competing in a saturated market.
By pooling together, sometimes after Chapter 11, the North American airline market is now one of the most consistently profitable.
However, merging will be easier said than done for the oil-and gas operators. Consolidation is unlikely until all Chapter 11s are resolved and financials look at least in rudimentary health.
Given Bristow and PHI’s current travails, that is not happening anytime soon enough.
However, there is a further problem for the operators – funding and its availability.
The funding gap
Even before PHI’s filing and Bristow saying Chapter 11 is a real option, helicopter-related debt has certainly not been helping itself win admirers over the last couple of years.
Poor performance of helicopter operator issued notes, bonds and equity in secondary trading plus the losses these lenders have been realizing during Waypoint’s bankruptcy all could diminish the volume of institutional money willing to invest, Imperial Capital’s David Fowkes told Helicopter Investor in February.
Certainly, banks’ risk officers are also likely to take dim view of any further lending. Indeed, McGinn notes that bank debt has been slow to be signed off for the past couple of years.
It is logical to assume the current state of play for oil-and-gas operators will only exacerbate this situation.
So, what are the alternatives for operators that will need funding?
“Likely, only private equity will look at these operators now, as banks are going to be on the side-lines,” says McGinn.
Yet private equity looks for short-term results, and will want a good deal, especially given the macro uncertainty swirling around already fiscally troubled operators.
“Private equity invests on three- to five-year cycles. In that time you’ve got a US presidential election, Brexit and other geo-political uncertainties that will all impact oil. Who is going to take a bet on 2021 or 2022 now?” McGinn adds.
What does the future hold for operators? While it is hard to make any bold predictions, it might very well be that their current troubles start to cascade around the market, leading to a drying up of funding, increasing pressure on lessors.
“The danger of waiting so long is that now these latent issues are coming home to roost, the operators’ woes are starting to infect other parts of the supply chain. Lenders and lessors are all being impacted by the operators’ woes, denting confidence in the market throughout a variety of stakeholders. Crucially, this means that the operators may find themselves without support they need at this juncture,” says McGinn.
Predicting exactly what will happen to the oil-and gas market over the next few years is nigh on impossible. However, given the existing problems faced by operators, compounded by funding likely becoming scarcer and a volatile operating market, one can be reasonably confident in saying the next few years look unlikely to be easy.
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