Babcock takes £85m hit on aviation segment

Babcock has written down £85m on the book values of its “predominantly oil and gas” aviation assets and leases, according to its latest trading update.

The UK industry and defence group warned investors of the exceptional charges for its aviation business in its updated financial guidance published yesterday (February 12), ahead of its full-year results expected to be published next month.

Babcock also updated its predicted net profits for the year to around £540m, in line with its lower estimations of the £540m – £560m predicted in November 2019.

“Oil and gas continues to be a tough market,” Babcock stated in the update. “The three large providers of helicopter services which operate worldwide in oil and gas have all emerged from Chapter 11 bankruptcy protection with reduced debt and written-down assets.”

“This has effectively reset global market pricing levels, forcing us to respond quickly to remain competitive. We will also exit our oil and gas businesses in Ghana and Congo.”

Babcock has also offset revenues related to emergency medical services (EMS) contracts in Italy and Spain, pushing the revenue into future periods. In 2019 oil and gas comprised 18% of the firm’s aviation revenue, defence 35% and aerial emergency services 47%.

Following these announcements, Babcock shares fell about 5% this morning after the trading update was published.

“Babcock is limited to what it can say outside of the trading update,” a spokesperson told Helicopter Investor.

The update can be read in full here.

Previous impairments

This £85m write down is not the first time Babcock has impaired assets due to the underperforming oil and gas market.

For the six months ended in 30 September 2019, Babcock cited overcapacity and underutilisation of its helicopter assets as the reason for an £80m impairment charge. £38m of the impairment was to reduce the carrying value of the group’s owned oil-and-gas helicopter fleet to its market value; with the remaining £42m related to leased oil-and-gas aircraft.

Babcock noted that “intense competition”, oversupply and underutilisation drove down profit margins for the group’s oil and gas segment to low single digits. However, revenue for the period grew slightly.

It also took a £100m hit on the acquisition of fellow oil and gas helicopter operator Avincis in 2014 prior to the oil-price crash.