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Transcript of Final Report - ERA.PDF
ERA GROUP INCORPORATED ERA/NYSE
Initiating Coverage: Soaring Over Deep Waters
Investment Rating: Market Outperform
Spin‐off from SEACOR Holdings occurred on January 31, 2013
The decline in oil prices should negatively impact drilling activity
Light‐ and medium‐weight fleet limits Era’s ability to profit from deepwater expansion
Joint‐venture in Brazil trades high rewards for high uncertainty
Helicopters allow Era to compete in markets outside of the oil and gas industry
Resignation of CEO may signal strategic changes
Our 12‐month target price is $30
Company Quick View:
Era Group, Inc. is a Houston‐based international helicopter operator that largely services offshore oil and gas drilling rigs in the Gulf of Mexico and Alaska. Era provides helicopters to the offshore energy industry, and offers search and rescue, flightseeing, air medical, training, and dry‐leasing services. Era is part of the Helicopter Transportation Services industry. Company Website: www.eragroupinc.com
Analysts: Investment Research Manager: Gregory Cohen Karla Thurber Emma Culotta Austin King Harrison Mona
November 18, 2014
PRICE: $ 24.92 S&P 500: 2,051.80 DJIA: 17,687.82 RUSSELL 2000: 1,170.28
ValuationEPS*P/ECFPSP/CFPS
* Excluding non‐recurring item
2013 A$ 0.8828.3x $ 3.147.9x
ms
2014 E$ 1.0324.2x $ 1.5815.8x
2015 E$ 1.5116.5x $ 4.415.7x
Market Capitalization Stock DataEquity Market Cap (MM): $ 508 52‐Week Range: $19.53 ‐ $34.64
Enterprise Value (MM): $ 828 12‐Month Stock Performance: ‐19.22%
Shares Outstanding (MM): 20.37 Dividend Yield: 0.00%
Estimated Float (MM): 19.01 Book Value Per Share: $ 22.78
6‐Mo. Avg. Daily Volume: 109,023 Beta: 1.16
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.
Wall Street's Farm Team
BURK
ENRO
AD R
EPO
RTS
4/1/13 4:47 PM
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Figure 1: 5‐year Stock Price Performance
INVESTMENT SUMMARY
We rate Era Group as a Market Outperform with a one year price target of $30.
Era Group is a Houston‐based company that primarily leases helicopters out of the Gulf of Mexico and Alaska, and services clients in Brazil, India, Canada, Mexico, Spain, Norway, Sweden, Uruguay, and the United Kingdom. In fiscal year 2013, Era earned 75% of its revenue from oil and gas clients. The remainder of Era’s revenue came from leasing helicopters to the U.S government and foreign affiliates and for flightseeing, firefighting, search and rescue, and air medical operations. As of the third quarter of 2014, Era’s fleet consisted of 160 helicopters. Era’s Chief Executive Officer (CEO), Sten Gustafson, who was instrumental in organizing both Era’s spin‐off from SEACOR and its initial public offering, resigned on August 28, 2014.
Although the price of oil is expected to be low through 2015, many deepwater drillers will continue to make a profit as long as the price remains above approximately $70 per barrel. This cutoff price is the high end of the cost curve for the average estimated cost per barrel for deepwater drilling according to Morgan Stanley Equity Research. A long‐term low‐price oil environment will decrease demand for Era’s services, but the current rapid expansion into deepwater drilling may negate the effects of low oil prices on Era’s operating revenue. Expansion into deepwater drilling reserves will provide more demand for helicopter companies, as helicopters are the most rapid mode of transportation to offshore drilling rigs. Because many deepwater rigs are located as far as 200 to 250 miles off the coast, boat travel in the Gulf of Mexico can take hours, but helicopters can make the trip in a little over one hour. Heavy helicopters are frequently used when providing transportation to deepwater oilrigs because they can carry seven to eight more people than medium‐size aircraft. Thus, Era’s lack of heavy helicopters may stymie its ability to compete with other helicopter service providers.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Notably, Era derived 5% of its operating revenue in 2013 from its Brazilian joint‐venture, Aeróleo. But, Era has experienced difficulty collecting receivables from its joint‐venture because of Aeróleo’s problems with its main customer, Petrobras Brazil. Era will need to further integrate itself into Aeróleo’s operations to ensure collection of its future receivables. As such, Era has $27.8 million in delayed revenues owed by Aeróleo, which will significantly boost future revenues upon payment.
To be clear, Era is not an oilfield services company, but 69% of its revenue from third quarter of 2014 came from clients in the offshore energy industry. Era currently uses most of its assets to serve the oil and gas industry, but Era can use its helicopters for whichever services are deemed the most profitable. If oil prices continue to stay low, Era can reallocate its services to industries experiencing higher demand for helicopters.
INVESTMENT THESIS
Spin‐off from SEACOR Holdings occurred on January 31, 2013
SEACOR Holdings (CKH) is an international provider of support services to the offshore marine transportation and oil and gas industries. Era Group separated from SEACOR in a spin‐off on January 31, 2013. Each CKH shareholder received one share of ERA for each share of CKH held as of the record date of January 24, 2013. SEACOR initiated the spin‐off to ensure that its resources were put to use in a manner that would best suit the Company and its stockholders.
The decline in oil prices should negatively impact drilling activity
Our outlook for oilfield services companies over the next 12 months is negative because we expect oil prices to remain low. We believe oil prices will continue to fluctuate between $70 and $85 per barrel through 2015. Lower oil prices equate to less drilling activity, which leads to reduced demand for oilfield services. Because Era derived 75% of its 2013 revenue from oil and gas clients, Era is vulnerable to risks inherent to operating in a low‐priced oil environment. Era mitigates this risk by using three quarters of its fleet to service the production side of the business, which is not as affected by the decline in pricing as the exploration side. We expect Era’s clients to continue drilling in unconventional, deepwater reserves as long as the price of oil remains above $70 per barrel. However, we expect that these clients will drill at a more conservative pace than the $88 to $110 per barrel drilling environment of 2013. Compared to its competitors, Era has relatively few heavy helicopters in its fleet. This disadvantage in fleet size may hinder Era from taking advantage of the rapid expansion into attractive deepwater reserves in the Gulf of Mexico. For these reasons, we expect Era’s operating revenue to grow 14% from 2013 to 2014 and 6% from 2014 to 2015.
Light‐ and medium‐weight fleet limits Era’s ability to profit from deepwater expansion
Although low oil prices will incentivize oil companies to forego future expensive drilling projects, the demand for deepwater drilling will continue to increase. Deepwater drilling maximizes the profit from each drilling excursion, which is critical when oil prices are low.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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As of January 2014, U.S. Geological Survey data estimated that 48 billion barrels of deepwater deposits exist in the Gulf of Mexico, making it the largest domestic supply of oil and natural gas. At the end of 2013, 42 rigs operated in excess of 1,000 feet of water, and by 2015, roughly 60 deepwater rigs are expected to operate in the Gulf. With 13 strategically‐placed bases around the Gulf of Mexico, Era Group is making an effort to be prepared for this upturn in activity. The challenge, however, lies in its fleet size and composition. Deepwater drilling requires the use of heavy helicopters, which specialize in traveling long distances to deepwater oilrigs. Era currently has nine heavy helicopters, whereas some of its competitors have as many as 144 heavy helicopters. Era’s fleet size and heavy/fixed wing aircrafts compared to its main competitors can be seen in Figure 2 below.
Figure 2: Era and Peer Group Helicopter Fleet Makeup
Source: Company Information 2014
Era’s limited supply of heavy helicopters will negatively impact its revenue in the near future because its medium‐ and light‐weight helicopters are unable to command the same premium day rates as competitors’ heavier fleets. In an attempt to catch up, Era has ordered 14 heavy helicopters to be delivered before 2017, with the option to order an additional 15 heavy and four medium helicopters. Although this purchase will significantly increase expenses and reduce net income in the short‐term, Era’s investments in heavy helicopters are necessary to compete in the oil and gas services industry.
Joint‐venture in Brazil trades high rewards for high uncertainty
Since its July 2011 investment, Era has experienced repeated difficulties collecting revenues from its joint‐venture partner Aeróleo, an air support provider to the Brazilian oil and gas industry. The aircraft that Era Group has in Brazil represents just below 20% of the Company’s total fleet value.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Because of multiple contract cancellations by Aeróleo’s biggest customer, Petrobras Brazil, Aeróleo has gone from providing 10% of Era’s total revenues in 2011 to providing only 5% in 2013, and owes $27.8 million to Era. Despite these setbacks, Era Group continues to invest in Aeróleo. Starting in December 2014, Aeróleo will dry‐lease seven AW139s to Petrobras. Petrobras currently has $170 billion in debt, making it the most indebted integrated oil company in the world. As of November 2014, federal police have arrested 18 Petrobras and construction company executives accused of a bribery and money‐laundering scheme that has illegally transferred hundreds of millions of dollars from Petrobras into the hands of employees, contractors, and politicians. Petrobras has hired two independent law firms to look into whether or not it will have to readjust its financial information, making future revenue payments even more uncertain. Further, the Brazilian government has the power to greatly affect the performance of Petrobras if the administration allows the company to increase its prices for domestic oil. The government will not grant this permission while the price of crude oil brings international benchmarks closer to Brazil’s subsidized refinery gate prices. Nevertheless, a decrease in the gap between domestic and international oil prices, along with forecasted increases in oil production and exports from Brazil, would help free up Petrobras’s cash flows to make payments to Aeróleo. Because of the uncertainty of the future payment abilities of its main customer, Petrobras, we believe that Aeróleo is a risky joint‐venture that may require additional integration with and an infusion of capital from Era Group to continue operations.
Helicopters allow Era to compete in markets outside of the oil and gas industry
Era’s fleet of 160 helicopters is made up of 56% light‐weight helicopters, 39% medium helicopters, and 5% heavy helicopters. These helicopters have average ages of 10.8, 12.5, and four years, respectively. Aside from oil and gas support, Era provides aviation services such as search and rescue, air medical services, firefighting support, and sightseeing. Governments continue to privatize search and rescue services, which carry especially high margins that Era Group is positioned to take advantage of with its light and medium helicopters. Additionally, Era sells helicopters as part of its ordinary course of business to capitalize on market opportunities. Era’s helicopters have an estimated useful life of 15 years and can be disposed of at an average salvage value of 40%.
Resignation of CEO may signal strategic changes
On August 28, 2014, the Chief Executive Officer (CEO) of Era Group, Sten Gustafson, resigned. The Board of Directors appointed the current Chief Financial Officer (CFO) and Executive Vice President, Chris Bradshaw, as the interim CEO until a permanent replacement is found. During the third quarter earnings call, Mr. Bradshaw noted that the Board of Directors asked Mr. Bradshaw to commence a search for a new CFO. If Mr. Bradshaw is replaced as CFO, this may raise the likelihood that he may be kept on as the replacement CEO. Mr. Gustafson had served as CEO of Era Group since April 1, 2012, and played an instrumental role in managing the Company during its divestiture from SEACOR. During this transitional period, we recommend closely monitoring Era Group’s operating performance.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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VALUATION
We used four valuation methods to arrive at a one‐year target stock price for Era Group of $30.00. To reach this number, we used the multiples forecasting methods price to earnings (P/E), price to book value (P/BV), price to cash flow (P/CF), and enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA). We used Era’s main competitors, Bristow Group, CHC Group, Erickson, and PHI to calculate P/E, P/BV, and P/CF peer comparison ratios. For EV/EBITDA, we excluded Bristow Group from the comparable firms because of its relatively high EV/EBITDA value that skewed the peer group average up by 27 percent. Although we originally forecasted using the discounted cash flows (DCF) method, we decided that the multiples methods are more reliable yardsticks for Era Group because they better account for Era’s heavy investment in tangible assets.
Figure 3: 12‐Month Target Price
INDUSTRY ANALYSIS
Era operates in the helicopter transportation industry, which is a subsector of the larger oil and gas services industry. The oil and gas services industry’s market capitalization is approximately $700 billion and consists of thousands of companies that perform services to facilitate oil and gas production. Despite several barriers to entry, such as high capital requirements, customer certification, and access to strategic locations, the helicopter industry remains highly competitive. Era’s primary competitors in the helicopter transportation subsector are Bristow Group, PHI Inc., Erickson Air‐Crane, Inc., and CHC Group Ltd. The collective market capitalization for these four companies plus Era totals $4.43B, of which Era represents a 10.7% share. Era and its competitors also generate revenue from various other aviation‐related services such as leasing, training, storage, search and rescue, air medical services, firefighting support, and sightseeing.
The buyers of helicopter transport services are major oil and gas exploration and production companies. In 2013, Era received 64% of its total revenues from only ten customers. The industry as a whole follows a similar trend, with top‐ten clients making up at least 50% of total revenues. Therefore, the bargaining power of buyers in the oil and gas services industry is fairly high. Major players like Anadarko, Shell, and Exxon can negotiate prices because they contribute to such a large portion of service providers’ revenues.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Regulatory Environment
Air carriers must abide by federal, state, and local regulations within the U.S. and by the laws and regulations of foreign jurisdictions where they operate and have registered equipment. Within the U.S., air carriers must abide by the regulations of the U.S. Department of Transportation (DOT) and the Federal Aviation Administration (FAA). The DOT regulates a company’s status as an air carrier while the FAA regulates and extends jurisdiction over flight operations.
Helicopter owners operating within the U.S. must abide by the Federal Aviation Act (the Act). Under conditions of the Act, before a helicopter can operate in the U.S., “citizens of the U.S.” must be the rightful owners of the helicopter. Era fulfills the three requirements for citizenship: the company must incorporate itself under U.S. law, U.S. citizens must own at least 75% of the voting interests, and the president and at least two‐thirds of both the managing officers and board of directors must be citizens of the U.S. Era may face penalties if the Company is not capable of complying with federal regulations. Era also faces inherent costs associated with abiding by regulatory standards.
Era is indirectly affected by regulations that govern the offshore drilling industry because 75% of Era’s 2013 revenue came from customers that operate in that industry. In the wake of the 2010 Macondo oil spill, the regulatory environment for oil and gas companies operating in the U.S. changed. The Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) was reorganized to form the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE). With these changes came stricter regulations, including more scheduled maintenance of offshore drilling equipment, more fail‐proof measures on rigs, and more rigorous rig performance tests. Oil and gas companies that operate in the Gulf of Mexico face costs to comply with these new regulations. The impact of these regulations has adversely affected revenues, equipment costs, and rig out‐of‐service times for many of the key players in the Gulf of Mexico.
Era’s main customers in the Gulf of Mexico are facing regulatory pressure in constructing new offshore drilling wells. Therefore, Era may see an increase in flight hours associated with oil companies performing more frequent rig maintenance and government inspections. The counteracting demand for Era’s services suggests that Era is better situated to deal with new drilling regulations than many other oil field service companies that contract in the Gulf of Mexico.
Key Industry Metrics
The three key industry metrics that will affect helicopter services providers are oil and gas prices, rig count, and rig utilization rates.
The prices of crude oil and natural gas critically influence the future performance of helicopter transportation providers like Era Group. Falling oil and gas prices will reduce demand for helicopter services, while rising oil and gas prices will increase demand for services.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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If the price of crude oil drops below the U.S. Energy Information Administration’s (EIA) estimated price per barrel range for an extended period of time, many oil and gas companies would likely reduce their deepwater involvement because lower crude oil prices hurt margins for the oil and gas companies. Figure 4 below shows historical prices and future predictions of West Texas Intermediate (WTI) crude oil prices. As of November 12, 2014, the EIA expects WTI crude oil prices to average $80 per barrel in the fourth quarter of 2014, and $78 per barrel in 2015. The EIA noted in its most recent outlook that energy price forecasts are highly uncertain and that, with a confidence interval of 95%, the average WTI prices for February 2015 could be as low as $63 per barrel or as high as $99 per barrel. Weakening demand and plentiful supply indicate that WTI crude oil prices will decline further through 2018, according to the Economist Intelligence Unit (EIU). Such a severe decline would greatly reduce operating profits for companies in the oil and gas services industry and subsequent demand for Era’s services.
Figure 4: West Texas Intermediate (WTI) Crude Oil Price 2015
Source: Short‐Term Energy Outlook November 2014
Another important metric to consider when evaluating Era and its competitors’ growth is the number of offshore rigs. From 2013 to 2014, the number of active U.S. offshore oilrigs increased 8.8% to a total of 62. The more rigs in operation, the more opportunities helicopter services providers have to fly personnel out to the rigs. Because the output of oil and gas wells is consistently declining, exploration & production companies must eventually expand the number of rigs they operate if they want to sustain or increase output. Although new rig construction is an indicator of Era’s future performance, the size of the rigs downplays the importance of the actual number of rigs. The newer rigs and production facilities are larger and have increased people on board counts in the Gulf of Mexico. All else being equal, companies will need more helicopters to move the additional bodies.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Rig utilization is a key metric in analyzing industry performance. A high rig utilization rate indicates that the industry is operating close to capacity while a low rig utilization rate may indicate an oversupply of rigs. A higher percentage of rig utilization equates to more demand for Era’s services. Data from November 2014 shows the rig utilization rate for the U.S. Gulf of Mexico at 70%, as seen in Figure 5 below. Although this percentage is up nearly 4% since September, the ratio of rigs being utilized to rigs not being utilized in the Gulf of Mexico ranks relatively lower than other offshore drilling regions. Because the Gulf of Mexico is Era’s primary operating region, a lower‐than‐average rig utilization rate does not bode well for future revenue growth. If Era conducts more operations in regions that experience a high rig utilization rate, like Brazil, this will be a key driver of future revenue growth.
Figure 5: Current Competitive Offshore Rig Utilization by Region
Source: Rigzone.com, Inc. November 2014
Competitors
The threat of entry to the oil and gas equipment and services industry is fairly low because entry requires a large capital investment in high‐tech and expensive equipment. The number of providers, in conjunction with the buyers’ significant bargaining power, leads to competitive pricing and offerings of services. Era Group has a few major rivals in each key segment of its regional and global markets. As such, Era differentiates itself through diverse products and service lines. Not only does Era boast a uniquely versatile fleet of helicopters, but it also offers the services of dry‐leasing, air medical, emergency response, search and rescue, firefighting, and flightseeing.
Era’s largest competitors in the Gulf of Mexico are Bristow Group, Inc., PHI, Inc., and CHC Group, Ltd. The primary competitors in Alaska include Erickson, Inc., and PHI, Inc. During fiscal year 2013, Era earned $299 million in operating revenue. As shown in Figure 6 below, Bristow, PHI, CHC, and Erickson reported approximately $1.5 billion, $857 million, $1.7 billion, and $318 million in operating revenue, respectively. Era’s market share compared to its competitors is demonstrated in Figure 7. Era also has various competitors in the air medical services and dry‐leasing businesses.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Figure 6: Industry Competitors Operating Revenue Fiscal Year 2013
Source: Company Reports 2013
Figure 7: Market Share by Revenue (millions)
Source: Company Reports 2013
Era Group has few potential substitutes due to a low number of direct competitors and the ineffectiveness of other transport. Airplanes are not good substitutes for Era’s helicopter services in the oil and gas support industry because most oil rigs cannot accommodate an airplane landing. Although they can hold more than three times the number of passengers, crew boats are not practical when dealing with time sensitive and dangerous weather situations. Era does, of course, have to pay attention to top competitors in each market segment, as shown in Table 1 below.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Table 1: Era’s Competitors by Geographic Markets
U.S. Gulf of Mexico Bristow Group, Inc., PHI, Inc., Rotorcraft Leasing Company, LLC, CHC Group, Ltd.
Alaska Erickson Air‐Crane, Inc., PHI, Inc.
Brazil Lider Aviação Holding S.A., OMNI Táxi Aéreo Ltda., Brazilian Helicopter Services Taxi Aéreo Ltda.
Source: Era Group 2013 Annual Report
Suppliers
The suppliers in the oil and gas equipment and services industry are helicopter manufacturers. The few existing U.S. helicopter manufacturers demand high prices for their products because of the relatively limited supply. Helicopter services providers, however, can negotiate prices because the majority of the manufacturers’ revenue comes from a small number of helicopter services providers. The result is a balance of bargaining power between helicopter suppliers and buyers.
Era buys helicopters and replacement parts from at least seven different corporations, including, but not limited to, Agusta Aerospace Corporation, Airbus Helicopters Inc., Bell Helicopter Textron Inc., and Honeywell International.
ABOUT ERA (ERA/NYSE)
Era Group, Inc. is an independent helicopter leasing and service company that split from SEACOR Holdings, Inc. on January 31, 2013. Era Group primarily leases helicopters out of the Gulf of Mexico and Alaska, but also has clients in Brazil, India, Canada, Mexico, Spain, Norway, Sweden, Uruguay, and the United Kingdom. Era transports individuals to and from offshore oil and gas drilling rigs, platforms, and installations. Major integrated and independent oil and gas companies like Anadarko Petroleum Corporation (Anadarko), Exxon Mobil Global Services Co. (Exxon), Shell Exploration and Production Company (Shell), and Petrobras America Inc. (Petrobras America) make up the majority of Era’s client base. Era also contracts with the U.S. government, particularly through the Bureau of Safety and Environmental Enforcement (BSEE). Era Group trades on the New York Stock Exchange under the ticker “ERA.” Era Group is headquartered in Houston, Texas.
Products and Services
Era Group’s main revenue stream comes from transports to and from offshore oil and gas drilling rigs. The U.S. Gulf of Mexico, where Era does the majority of its business, is the largest oil and gas aviation market in the world. Era’s Alaska segment also provides services to oil and gas companies.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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For fiscal year 2013, 75% of the Company’s operating revenue was generated through helicopter services to clients in the oil and gas industry. In addition to the flights to and from the oilrigs, Era Group offers advanced proprietary flight‐following systems, Era training services, maintenance operations, search and rescue services, and dry‐leasing. Specifically, Era dry‐leases helicopters to foreign affiliates and third parties who assume operational responsibility in providing services to their local markets. Era’s Alaska operations also offer flightseeing, firefighting, and mining services. Also, Era provides air medical services to the northeastern U.S. and Florida.
Joint Ventures
As of year‐end 2013, Era had a significant interest in two joint ventures that integrate well into the Company’s existing business model. Era holds a 50% interest in Dart Holding Company, Ltd. (Dart), a joint venture based out of Canada. Dart designs and manufactures after‐market helicopter parts and accessories. The company sells its products to helicopter manufacturers and operators. Dart also distributes helicopter parts and accessories on behalf of other manufacturers. Era also holds a 50% interest in Era Training Center, LLC (Era Training). The joint venture is based out of Lake Charles, Louisiana, where Era Training provides flight simulations, instruction, and other training to employees, third‐party pilots, government agencies, and other helicopter companies. In July 2014, Era Group sold its 51% interest in Lake Palma, S.L. (Lake Palma), a joint venture between Era and Spain‐based firefighting operator Fumigacion Aerea Andaluza S.A. (FAASA). FAASA paid a premium of $9.2 million, which Era expects to recognize as a gain of $2.3 million in the third quarter of 2014.
In July 2011, Era Group acquired a 50% economic interest and 20% voting interest in Aeróleo, a logistical air support provider to the Brazilian oil and gas industry. According to the U.S. Energy Information Administration, recent discoveries of large offshore, pre‐salt oil deposits could transform Brazil into one of the larger oil producers in the world. Era Group’s acquisition of Aeróleo has endured some trouble. In August 2011, Aeróleo dry‐leased several AW139 helicopters from Era Group to contract to one of its main customers, Petrobras Brazil (Petrobras). Petrobras cancelled its award for AW139 helicopters after an accident involving an AW139 helicopter on contract with Petrobras from one of Aeróleo’s competitors. As a result, four of Aeróleo’s AW139 helicopters remained idle from August 2011 until end of November 2012. In addition, Petrobras Brazil attempted to suspend its contracts with Aeróleo for EC225 helicopters starting April 1, 2013. Petrobras has yet to make its monthly payments for its EC225 helicopters from April through October 2013, as of June 30, 2014. Consequently, Era Group deferred $26.7 million of revenues owed by Aeróleo. Another Aeróleo customer, OGX Petroleo & Gas Participacoes SA (OGX), has filed for bankruptcy. Services provided to Aeróleo accounted for 5% of Era Group’s revenues in 2013, down from 10% in 2011. While services to Aeróleo account for a shrinking percentage of Era’s revenue, losing business from any one of Era’s clients could have an adverse effect on its bottom line.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Corporate Strategy
Era Group, Inc. currently employs five corporate strategy tactics to realize its goal of becoming a premier global provider of helicopter transport and related services: new market expansion, dry‐leasing development, fleet upgrade, earnings diversification, and strategic acquisitions. Era Group is focusing on expanding into new and growing geographic markets, including countries in Latin America, Asia, Australia, and Europe. The Company captures growth opportunities by reaching offshore oil and gas markets that are underserved by larger multinational helicopter operators. Era Group takes advantage of dry‐leasing opportunities in emerging, international oil and gas markets and supplies a selection of modern helicopters and related services to customers. Figure 8 shows the percentage of Era’s operating revenues that are generated within the United States and abroad. As a regular part of business, the Company continues to expand and upgrade its fleet by buying, selling, and leasing out equipment in response to customer demand and market conditions. Era Group diversifies its sources of earnings and cash flow with joint ventures in related markets, providing after‐market helicopter parts and accessories, instruction, flight simulation, and training to customers. Era Group actively pursues potential joint venture opportunities and strategic acquisitions to enter new markets and grow its business. The Company counts risk diversification and flexibility in terms of capital structure as two of its key strategic strengths.
Figure 8: Era’s Operating Revenues
Source: Era Group 2013 Annual Report
Competition
At the beginning of 2010, the Gulf of Mexico contained 33 deepwater rigs that were actively working, being shipped to the region to start working, or waiting in local shipyards about to start working. The Gulf of Mexico now has 62 deepwater rigs that are currently working, shipping, or waiting in 2014.
Despite several barriers to entry such as customer certification and access to strategic locations, the helicopter industry remains highly competitive because of high demand and high buyer bargaining power. Era’s chief competitors in the Gulf of Mexico are Bristow Group, Inc., PHI, Inc., and CHC Group, Ltd. The primary competitors in Alaska include Erickson, Inc. and PHI, Inc. Era also has various competitors in the air medical and dry‐leasing businesses.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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Competitive Advantage
Although Era provides its aviation services around the globe, its main competitive advantage resides in the U.S. Gulf of Mexico and, to a lesser extent, Alaska. Era developed sophisticated offshore flying techniques and was the first company in the Gulf to receive Federal Aviation Administration (FAA) approval for an Airborne Radar Approach (ARA). Era also implemented the Supplementary Aviation Weather Reporting System (SAWRS) in response to the Gulf’s volatile weather. These efforts have solidified Era’s presence in deepwater solutions for the offshore energy industry. Operating from thirteen strategically located bases in the Gulf, Era competes in a region that is expected to outpace other markets in deepwater production in the coming years. Era can also accommodate oil and gas companies that operate in extremely remote locations across Alaska.
Era has established itself as a cost‐effective, reliable, and knowledgeable operator, and has thus been able to secure several critical relationships with domestic and international clients. One of Era’s major competitive advantages is its modern fleet that is capable of satisfying an array of client needs. As of September 30, 2014, Era owned or operated 160 helicopters, including heavy, medium, and light helicopters. Each type of helicopter is designed to perform a specific type of mission, making Era’s versatility highly attractive to potential customers. In addition to its world‐class fleet, Era owns and maintains offshore and onshore fuel facilities, which enable its helicopters to fly more than 240 miles into the Gulf of Mexico.
Financial Performance
The third quarter of fiscal year 2014 was highly successful for Era Group, resulting in record revenue of $90.5 million. Seasonal factors like longer daylight hours for oil and gas operations and the start of flightseeing and firefighting activities increased operating revenues by 9% from first to second quarter 2014 and by 2% from second to third quarter 2014. Operating revenues increased 12% from third quarter 2013 to third quarter 2014 despite a 10% decrease in flight hours. This year‐over‐year increase is attributed to the full return to service of EC225 helicopters and the increased charter activity of high‐rate medium helicopters. Despite improvement in revenue collection in the Gulf of Mexico and internationally, Era’s Alaska revenue decreased 43% on a third quarter year‐over‐year basis due to a smaller fleet and lower medium helicopter utilization. In the third quarter 2014, Era deferred a revenue balance of $27.8 million from its joint‐venture Aeróleo and $1.7 million from a customer in India. With net income of $4.3 million in the third quarter, Era declared adjusted earnings per share of $0.21, excluding after‐tax CEO severance costs and derivative losses.
In March 2014, Era Group amended its credit facility by increasing borrowing capacity from $200 million to $300 million, which will be used to purchase new helicopters and for general working capital purposes. In August 2014, the Company authorized the share repurchase of up to $25 million in value of its common stock, to be executed on a discretionary basis over time. On August 28, 2014, Era Group announced the resignation of its Chief Executive Officer (CEO), Sten Gustafson, and appointed Executive Vice President (EVP) and Chief Financial Officer (CFO) Chris Bradshow as acting CEO.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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PEER ANALYSIS
The global helicopter transportation sector of the oil and gas services industry is made up of several private and public aviation companies. Bristow Group, Inc., PHI, Inc., CHC Group, and Erickson, Inc. are publicly traded companies that are comparable to Era Group in their company size, client base, and scope of operations.
Table 2: Comprehensive Peer Group Comparison Chart (in $MMs)
Company Ticker Market Cap
EV Revenue EBITDA
Net Income
P/E EPS D/E EV/
EBITDA
Bristow Group, Inc.
BRS $2,619 $3,611 $1,652 $305 $204 13.2 $5.58 62.95 11.84
CHC Group Ltd.
HELI $468 $1,815 $1,811 $167 $(176) N/A $(2.92) 260.67 10.87
Erickson, Inc.
EAC $200 $316 $368 $55 $(12) N/A $(0.68) 70.38 5.75
PHI, Inc. PHII $675 $1,016 $891 $131 $39 17.8 $2.48 87.78 7.76
Era Group, Inc.
ERA $463 $729 $323 $88 $17 27.6 $0.82 62.52 8.28
Source: Thomson One TTM – 6/30/14
BRISTOW GROUP, INC. (BRS/NYSE) Bristow Group, Inc. is a Houston‐based international helicopter services and aviation support company with an emphasis on serving the offshore energy industry. The company was founded in 1969 under the name Offshore Logistics and was renamed Bristow Group after its reverse takeover of the United Kingdom‐based company, Bristow Helicopters. With nearly 500 helicopters in service, Bristow boasts the world’s second‐largest air force after the U.S. military. As seen in Table 2, Bristow Group earns significantly higher revenue than competitors Era, PHI, and Erickson, totaling $1,652 million in the past twelve months. Bristow, like Era, operates in South America, Europe, and Asia. Bristow’s international involvement, however, is far more extensive, accounting for 86% of its total operating revenues while Era, on the other hand, only generates 22% of operating revenues overseas. Bristow operates a helicopter flight school, provides search and rescue services (SAR), and sells used helicopter parts. The company currently employs approximately 3,465 people. Bristow’s helicopter fleet contains 498 helicopters, of which 429 are used in its normal business operations while the remaining 73 are reserved for flight training. Bristow regularly seeks to extend business operations and grow through contract acquisitions.
CHC GROUP, LTD. (HELI/NYSE) CHC Group, LTD. is a helicopter services company specializing in deepwater rig transport, headquartered in Richmond, British Columbia, Canada. Despite generating the most revenue among Era and its competitors as seen in Table 2, CHC has been increasingly operating at a net loss for several years. CHC operates on a much more global scale than Era, with less focus on the Gulf of Mexico. The North Sea is CHC’s core operating area, accounting for roughly half of the company’s total revenue. CHC boasts the largest heavy and medium helicopter fleet in the industry with 236 aircraft, making the company well positioned to capitalize on the anticipated rise in ultra‐deepwater drilling.
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Offshore transportation attributes approximately 73‐78% of CHC’s flying revenue, while search and rescue services, medical services, flight training, and maintenance, repair and overhaul (MRO) account for the remainder of revenues.
PHI, INC. (PHII/NASDAQ) PHI, Inc. is a helicopter services company based in Lafayette, Louisiana that offers oil and gas, onshore mining, air medical, and technical services. Although PHI provides its services in 43 countries, its largest and most profitable segment of operation is the domestic oil and gas industry. In addition to its participation in the oil and gas industry, PHI’s second largest operating segment is the air medical segment. PHI owns a Phoenix‐based subsidiary called Air Evac Services, Inc. that provides a variety of medical services and carries a fleet of more than 80 helicopters. PHI’s third largest segment of operation is technical services, which provides full service maintenance and repair to flight operations customers that own their own aircraft. Of the four companies in Era’s chosen peer group, PHI, Inc. has the third highest revenue, ahead of Era Group and trailing Bristow Group and CHC Group. For the year ending June 30, 2014, PHI recorded a larger helicopter fleet and higher operating revenue than Era. PHI competes directly with Era for business in the U.S. Gulf of Mexico but does not operate in Alaska, where Era conducts search and rescue, flightseeing, and oil and gas operations.
ERICKSON, INC. (EAC/NASDAQ) Erickson, Inc. is an Oregon‐based international provider of aviation services to commercial and government clients. Since its founding in 1971, Erickson has acquired a fleet of nearly 100 aircraft, including utility helicopters, fixed‐wing aircraft, and its own Erickson Aircranes, for which it owns the Type and Production Certificates. The services that Erickson offers include critical supply and logistics for deployed military forces, humanitarian relief, firefighting, timber harvesting, infrastructure construction, and crewing. Like Era Group, Erickson leases aircrafts to customers for specific missions. Era Group competes with Erickson, Inc. in its Alaska operations, where both companies provide services for firefighting, search and rescue, and crew transportation for oil and gas companies. Erickson attributes 34.2% of its net revenue to domestic operations, which is low compared to Era’s 78% domestic revenue. Additionally, Erickson earned 70% of its total revenues from government‐related services like transport, firefighting, and defense and security in 2013. As shown in Table 2 above, Erickson has recorded higher revenue than Era for the past 12 months ending June 30, 2014. Despite this, Erickson is currently operating at a net loss.
MANAGEMENT PERFORMANCE AND BACKGROUND
Era Group, Inc. is managed by a group of skilled individuals who have extensive knowledge in the energy and aviation industries. Era adopted the Management Incentive Plan (MIP) to promote company growth by attracting and retaining highly qualified officers and executives, by motivating officers with performance‐related incentives, and by providing competitive incentive compensation opportunities. Era’s executive officers are compensated through a combination of base salary, cash bonuses, and equity‐based compensation. The executive officers of Era as of August 29, 2014, are listed below.
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Christopher S. Bradshaw Acting Chief Executive Officer, Executive Vice President, and Chief Financial Officer (37) The Board named Christopher Bradshaw Acting Chief Executive Officer on August 29, 2014, immediately following Sten F. Gustafson’s resignation. Mr. Bradshaw will carry out his duties as Acting Chief Executive Officer until the Board selects a permanent Chief Executive Officer. Mr. Bradshaw assumed his positions as Executive Vice President and Chief Financial Officer upon joining Era in October 2012. In addition to these positions, Mr. Bradshaw acts as an Officer and Director of certain Era Group joint ventures and subsidiaries. Prior to joining Era, Mr. Bradshaw co‐founded U.S. Capital Advisors LLC in 2009 and served as Managing Partner and Chief Financial Officer for the firm. Earlier in his career, Mr. Bradshaw was an energy investment banker at UBS Securities LLC, Morgan Stanley & Co., and PaineWebber Incorporated.
Shefali A. Shah Senior Vice President, General Counsel and Corporate Secretary (42) From Era’s spin‐off in February 2013 until February 2014, Shefali Shah served as Acting General Counsel and Corporate Secretary. Ms. Shah joined Comverse Technology in June 2006 and held positions as Senior Vice President, General Counsel, and Corporate Secretary over the course of her employment. Before Comverse, Ms. Shah was an associate at Weil Gotshal & Manges and Hutchins, Wheeler & Dittmar, P.C.
Stuart Stavely Senior Vice President ‐ Fleet Management (41) Stuart Stavely served as Vice President of Fleet Management from October 2010 to October 2012. Prior to his this position, he was Director of Technical Services from September 2008 through October 2010 and Director of Maintenance from September 2005 through September 2008. Mr. Stavely joined the company in 1993 and worked in various positions such as Chief Inspector and Field Aviation Maintenance Technician (AMT) before his promotion in 2005. He now serves as Senior Vice President of Fleet Management.
Paul White Senior Vice President ‐ Domestic (38) Before accepting the role of Senior Vice President in October 2012, Paul White served as Vice President, General Manager Gulf of Mexico of the Company from August 2010 to October 2012. From September 2008 to August 2010, Mr. White served as the Company’s General Manager of Training. Previously, he served as the Company’s Director of Training and filled other various roles, including Pilot, Check Airman, Senior Check Airman, and Assistant Chief Pilot CFP Part 135.
Jennifer Whalen Vice President and Chief Accounting Officer (40) Before serving as the Vice President and Chief Accounting Officer, Jennifer Whalen served as Era Group’s Controller from April 2012 to August 2013. From August 2007 to March 2012, Ms. Whalen worked for nLIGHT Photonics Corporation as the Director of Accounting. For the two years prior to this, Ms. Whalen served as the Manager of Accounting at InFocus Corporation.
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As of August 29, 2014, all seven of Era Group’s board members were non‐employee directors. The Board determined that five out of the seven directors were independent as defined by the regulations of the New York Stock Exchange and by the Board’s own “Era Categorical Standards”. The Board oversees the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee.
Charles Fabrikant Chairman of the Board (69) Charles Fabrikant is the Non‐Executive Chairman of the Board of Directors for Era Group, Inc. Mr. Fabrikant served as Director, President, and Chief Executive Officer of SEACOR Holdings from its inception in 1989 until September 2010. Today, he serves as SEACOR’s Executive Chairman and the President of Fabrikant International Corporation, a private company involved in marine investments. Era Group believes that Mr. Fabrikant’s knowledge of the maritime, transportation, investment, and environmental industries and his role as the founder of SEACOR make him a valuable asset to the Company’s Board of Directors. Mr. Fabrikant’s sizable position in Era common stock indicates that his interests are in line with Era’s shareholders.
Return on Invested Capital (ROIC) is a good measure of management’s performance because it demonstrates how effectively management has reinvested capital into the company to achieve growth. Because Era was a wholly‐owned subsidiary of SEACOR Holdings, however, its ROIC numbers prior to 2013 do not accurately reflect the decisions of Era’s current management. Table 3 compares the ROIC of Era and its competitors over the past four quarters. Era’s ROIC has consistently been below that of its peer competitors over the past year. In general, a high ROIC indicates that management is effectively reinvesting in the company. A low ROIC, however, could be due to the timing of when the investments are made and when the returns are generated. Era’s relatively low ROIC can be attributed to its fleet of light helicopters, which have a much lower return than medium and heavy helicopters.
Table 3: ROIC Reported Quarterly for Era Group and Peers
Company 06/30/2014 03/31/2014 12/31/2013 09/30/2013
Era Group, Inc. 3.74% 7.58% 8.96% 4.61%
Bristow Group, Inc. 15.30% 175.58% 17.56% 19.69%
PHI, Inc. 5.46% 12.07% 16.83% 13.96%
Erickson, Inc. 4.37% 18.17% 20.59% 9.34%
Peer Average 8.38% 12.61%* 15.99% 11.90%
Source: Thomson One October 2014 *Bristow excluded from Peer Average calculation for 1Q14
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SHAREHOLDER ANALYSIS
As of November 5, 2014 Era Group had 20,098,239 million shares outstanding and 18.97 million shares free floating. During the first quarter of 2014, Era repurchased 5,402 common shares at an average price of $30.69. Additionally, in the fourth quarter of 2013 Era repurchased 377 shares of common stock at an average price of $32.39. In August 2014, the Company authorized the share repurchase of up to $25 million in value of its common stock, to be executed on a discretionary basis over time. Era’s recent share repurchases indicate that Company management may believe that Era’s shares are undervalued, a signal of confidence in the Company’s future performance. The top ten institutional holders of Era’s stock collectively control 60.61% of the Company.
Table 4 lists the top ten holders of Era Group’s stock. This table breaks down the ownership interest of the largest investors by percentage of ownership interest and by the holders’ most recent percentage change in ownership. Six of the ten largest holders most recently acquired more stock in Era Group, while four of the ten recently relinquished some of their position in Era. This information is important to consider because many of these large holders control sizable positions in other companies and are constantly adjusting their portfolios to take advantage of where they believe to find the best returns in the market.
Table 4: Top Ten Holders as of October 7, 2014
Investor Name Shares
Outstanding (%) Latest Position Change (%)
Wellington Management Company, LLP 12.96% 0.66%
BlackRock Institutional Trust Company, N.A. 8.81% ‐3.12%
Artisan Partners Limited Partnership 7.35% 6.35%
Dimensional Fund Advisors, L.P. 6.54% 1.56%
Keeley Asset Management Corp. 5.41% ‐4.21%
Royce & Associates, L.P. 4.74% ‐1.34%
Fabrikant (Charles) 4.31% ‐0.60%
Rima Senvest Management, L.L.C. 4.04% 2.80%
The Vanguard Group, Inc. 3.59% 2.57%
Amici Capital, LLC 2.86% 0.00%
Source: Thomson One October 2014
Table 5 shows holding interest amongst Era Group’s insiders. The table displays the individual’s name, position, number of shares held, and the percentage of ownership interest in comparison to the Company’s other insiders. Monitoring insiders’ holdings provides valuable insight into assessing their company’s valuation and growth potential.
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Table 5: Insider Holdings as of October 7, 2014
Insider Name Title Total Holdings
Shares Outstanding (%)
Fabrikant (Charles L.) Chairman of the Board 863,570 63.81%
Lorentzen (Oivind III) Director 164,232 12.14%
Gustafson (Sten L.) Chief Executive Officer 85,542 6.32%
Bradshaw (Christopher Scott) Chief Executive Officer 51,047 3.77%
Webster (Steven A.) Director 33,069 2.44%
Shah (Shefali A.) General Counsel 32,000 2.36%
Stavley (Stuart) Officer 24,966 1.84%
White (Paul T.) Officer 22,165 1.64%
Reguero (Robert) Officer 15,130 1.12%
Rowles (Randal Rock) Officer 15,000 1.11%
Fogg (Blaine V.) Director 11,732 0.87%
Papouras (Christopher Pashalis) Director 8,982 0.66%
Sun (YuePing) Director 8,982 0.66%
Fairbanks (Ann O’Connor) Director 8,982 0.66%
Whalen (Jennifer Dawn) Officer 7,844 0.58%
Total 1,353,243 100.00%
Source: Thomson One October 2014
Table 6 breaks down the style of investors that own Era Group’s shares. This information is important to consider when setting standards for a stock’s long‐term growth potential. Evaluating investor styles also provides a benchmark in evaluating an investor’s market exposure. From this table, for example, one could conclude that dividend investors looking for a company with slow, stable growth would not invest in Era Group.
Table 6: Investor Style as of October 7, 2014 Investment Style Investors Value ($MM)
Index 33 113.13
Core Value 37 111.21
Core Growth 39 108.91
Hedge Fund 30 78.15
Deep Value 12 70.48
Growth At A Reasonable Price 24 12.05
Broker‐Dealer 17 6.54
Income Value 4 3.55
Growth 8 0.82
Aggressive Growth 3 0.65
Yield 1 0.00
Source: Thomson One October 2014
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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RISK ANALYSIS AND INVESTMENT CAVEATS
As a major helicopter services provider, Era Group endures many business risks, including operational, regulatory, and financial risks. These risks affect the Company’s daily decision‐making, as well as its short‐ and long‐term goals.
Operational Risks
Oil Price Fluctuations Fluctuations in prevailing oil and natural gas prices could significantly affect Era’s business operations. Oil and gas production levels largely drive the demand for Era’s services, and prevailing prices for oil and gas influence the demand for its extraction. Therefore, if oil prices were to drop and remain low for a significant period of time, offshore drilling levels would likely decrease, resulting in less demand for Era’s services and increased price competition within the helicopter transportation industry. Oil and gas prices are highly volatile because they are subject to an array of variables such as government programs, international relations, general economic conditions, and resource discovery.
Domestic Operations Era derives a majority of its revenues from operations in the Gulf of Mexico shelf and Alaska. In 2013, Era generated 73% of its total operating revenue from these regions, a significantly high portion considering the Gulf of Mexico and Alaska are mature regions that have been extensively drilled and explored. Although rig activity rates have historically risen in these regions, the prospect for sustained long‐term growth remains in doubt considering their maturity and potentially depleted oil reserves.
Major Players Era relies on relatively few clients for a large portion of its operating revenue. In 2013, Era derived 19%, 11%, 6%, and 5% of revenues from services provided to Anadarko, U.S. government agencies, Shell, and Aeróleo, respectively. Most of Era’s contracts with oil and gas companies can be canceled on relatively short notice and do not require that the companies purchase a minimum number of Era’s services. Era’s financial condition could be materially affected if any of its top clients were to significantly reduce its operations or cancel its contract.
Sophisticated Equipment Equipment failure and negligence could adversely affect operating revenues, public relations and, depending on insurance coverage, expose Era to liability. The operation of helicopters is inherently risky. Helicopters can be easily damaged or crash, which may result in personal injury or loss of life. Such events could endanger the safety of Era’s or its clients’ personnel, equipment, cargo, and other property, as well as the environment. A disaster of this sort could result in revenue loss, contract termination, higher insurance rates, and reputation damage.
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Land‐Based Opportunities The demand for Era’s offshore services could be adversely affected by a surge in attractive land‐based opportunities. As land‐based extraction technology advances and more deposits are discovered, offshore drilling prospects could become relatively more expensive and consequently less attractive. Therefore Era could experience a decrease in demand or could be competitively priced out of the market.
Seasonality and volatile weather conditions could materially impact flight hours. A significant portion of Era’s revenue is derived from flight hours. Prolonged periods of poor weather can adversely affect revenues. The Gulf of Mexico and Alaska present volatile and extreme weather conditions.
Financial Risks
Capital Intensive Industry Era’s business strategy inherently involves risk because of the additional capital it requires to achieve growth. Era’s business is capital intensive and may require raising additional funds through bank financings or other debt and equity financings. Standard & Poor’s gives Era Group a B‐ credit rating in both domestic and foreign Senior Unsecured Debt. If Era acquires additional capital through debt financing, the Company will incur increased interest expenses. Additionally, if Era chooses to issue additional equity to raise capital, it will dilute the value of existing shares for stockholders. Thus, if adequate sources of capital are not available, or if capital is not available on favorable terms, Era may be unable to acquire additional helicopters, take advantage of business opportunities, or respond to competitive pressures.
Debt Structure Era’s current debt structure poses potential risks. In December 2011, Era entered into a $350.0 million Senior Secured Revolving Credit Facility, which allows the Company to borrow money as needed up to the maximum amount. Era’s Revolving Credit Facility covenants require the Company to maintain a maximum funded debt to EBITDA ratio of 5.0 to 1.0 so that it may make investments, incur additional debt, pledge assets of certain subsidiaries, pay dividends, enter into transactions with affiliates, and sell off assets. If Era experienced a reduction in operating revenues, its ability to borrow under the Revolving Credit Facility may be limited, and the Company may require increased investment in its capital stock to maintain the required leverage ratio. Failure to comply with the covenants would result in a default of the Revolving Credit Facility, which in turn would allow holders of Senior Notes to accelerate their maturity as well. Tight credit conditions would limit Era’s ability to secure the additional financing necessary to promote overall company growth.
Subsidiary Interest Era derives revenue from non‐wholly owned entities. A financial loss may occur if problems arise between Era and its subsidiaries. Era is invested in five non‐wholly owned subsidiaries as a result of its interest in new‐market joint ventures and aviation regulatory requirements. Era owns a 50% or less interest in Dart, Aeróleo, Era Do Brazil, Era Training Center, and Heli‐Union Era Australia. If Era develops problems with its non‐wholly owned entities or with its local shareholders, Era’s overall financial condition and profit‐sharing could be adversely affected.
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Foreign Currencies and Exchange Rates
Era’s global operations are subject to foreign currency and exchange rate risks. Because approximately 22% of Era’s operating revenue comes from its international business, a sufficient portion of its capital purchase obligations are denominated in foreign currencies. Purchase costs of helicopters and helicopter parts from foreign manufacturers, along with maintenance costs in foreign countries, are subject to foreign currency fluctuations and exchange rate risks. Era mitigates its currency exchange risk by contracting the majority of its services in the U.S. dollar. When the U.S. dollar is strong, the cost of Era’s services increases, and foreign demand for services decreases. Although some of these risks may be hedged, Era’s financial condition and results of operations may be affected by the costs of hedging activities.
Regulatory Risks
Air carriers must abide by federal, state, and local regulations within the U.S. and by the laws and regulations of foreign jurisdictions where they operate and have registered equipment. Within the U.S., air carriers must abide by the regulations of the U.S. Department of Transportation (DOT) and the Federal Aviation Administration (FAA). The DOT regulates a company’s status as an air carrier while the FAA regulates and extends jurisdiction over flight operations.
Helicopter owners operating within the U.S. must abide by the Federal Aviation Act (the Act). Under conditions of the Act, before a helicopter can operate in the U.S., “citizens of the U.S” must own the helicopter. Era fulfills the three requirements for citizenship: the company must incorporate itself under U.S. law, U.S. citizens own at least 75% of the voting interests, and the president and at least two‐thirds of both the managing officers and board of directors must be citizens of the U.S. Era may face penalties if the company is not capable of complying with federal regulations. Era also faces inherent costs associated with abiding by regulatory standards.
Era can be indirectly affected by regulations that govern the offshore drilling industry as 75% of Era’s 2013 revenue came from customers that operate in the oil and gas industry. In the wake of the 2010 Macondo oil spill, the regulatory environment for oil and gas companies operating in the U.S. has changed. The Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) was reorganized to form the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE). With these changes came stricter regulations, including more scheduled maintenance of offshore drilling equipment, more fail‐proof measures on rigs, and more rigorous rig performance tests. Oil and gas companies that operate in the Gulf of Mexico face costs to comply with these new regulations. The impact of these regulations has adversely affected revenues, equipment costs, and rig out‐of‐service time for many of the key players in the Gulf of Mexico.
Era’s main customers in the Gulf of Mexico are facing regulatory pressure in constructing new offshore drilling wells. Therefore, Era may see an increase in flight hours associated with oil companies performing more frequent rig maintenance and government inspections. The counteracting demand for Era’s services suggests that Era is better situated to deal with new drilling regulations than many other oil field service companies that contract in the Gulf of Mexico.
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FINANCIAL PERFORMANCE AND PROJECTIONS
To evaluate Era Group’s one‐year price target, we made several operating, investing, and financing assumptions. These assumptions are key in driving the Company’s revenues and expenses.
Operating Activities
Our model utilized the size of Era’s helicopter fleet as the key driver of revenue. We were able to derive a meaningful correlation between Era’s helicopter fleet size and revenue. Taking into account the Company’s guidance for purchases of helicopters over the next couple years, our team was able to estimate Era’s average annual revenue per helicopter. We adjusted this value, as the future purchases of heavy helicopters will raise the average revenue per helicopter. If the Company chooses to purchase more heavy helicopters than previously indicated, this will raise Era’s earning potential and thus adjust our price target upwards.
Era’s operating and general and administrative costs were forecasted as a percentage of revenue. We expect that the historical correlation between these costs and revenue will continue.
Investing Activities
We used management’s guidance for future purchases of aircraft through 2017. Management expects between three and five heavy helicopters to be delivered annually between 2014 and 2017. The Company also has options to purchase an additional 19 helicopters during this time period. We did not factor any of these options into our evaluation as it is uncertain whether Era will exercise these options, and when the helicopters would be delivered if the options were exercised.
Financing Activities
We forecast that the Company will be able to finance its future operations and asset purchases from its operations and credit facility and without the issuance of further equity or long‐term debt. Under historical operating conditions, the Company should be able to pay off its $200 million of 7.75% senior notes when the notes mature in 2022. We believe that at least $5 million and $64 million will need to be borrowed under the Company’s credit facility in 2015 and 2016, respectively. Still, we do not believe that these borrowings will lead to any adverse material changes to the Company’s financial performance. Under predicted operating conditions, the Company should not have trouble repaying these credit facility obligations.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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SITE VISIT
The Era Group Analysts (minus Greg, who was bedridden with a fever of 102º!) gathered in front of Bruff, the Tulane University dining hall, promptly at 7:45 a.m. on October 24. Filled with the anticipation of meeting Era employees, along with pancakes and eggs from IHOP in our stomachs, we arrived at the Era Training Center, located at Lake Charles Regional Airport, at 10:58 a.m. Our group was immediately greeted by Melanie Landry, the Communications Coordinator, Benjamin Hulshoff, the Director of Maintenance, and Michael White, the Instructional Technician. Although Benjamin Slusarchuk, the Vice President of Finance, could not attend the meeting because Era was in a quiet period until November 4th, Melanie, Benjamin, and Michael were incredibly knowledgeable and gave a fantastic tour.
Melanie led us to the central training center building, where we ate lunch and asked some questions about the Company. After lunch, Benjamin led the group throughout the training center, starting with the building we ate lunch in. First, we saw the control center, where technicians monitored current flight operations throughout the Gulf of Mexico. We progressed to see the maintenance building, where several helicopters were stationed for their mandatory 30‐day inspections after every 1200 flight hours. Mechanics were inspecting, installing, and repairing many helicopter parts, ranging from the seats to the blades to the 1600+ horsepower engines. Next, we ventured outside to view the helicopters that were in the final stages of inspection (Image 1). These final stages include washing, paint jobs, and awaiting departure.
After seeing many other high‐tech and thought‐provoking facets of the facility, we continued to ask questions about Era’s financials. The Era employees had to be careful about which questions to answer because Era was currently in a quiet period. Despite this minor setback, we inquired about the demand for helicopters, the types of helicopters that are the revenue drivers, international and domestic development, macroeconomic trends (specifically oil prices), and competitive advantage. We gained a greater understanding of the industry as a whole, a glimpse into where the industry is headed, and Era’s position in the industry. Our group saved the financial questions for Benjamin Slusarchuk until after November 4th.
Lastly, Era generously allowed us to use its flight training devices (FTDs). These devices are flight simulators that use three different machines (to simulate flying three different types of helicopters) to train pilots to fly in many diverse situations. Michael operated the computer, which controlled the condition of the flight environment, and Harrison, Emma, and Austin alternated between flying the helicopter. In short, we all learned to leave the flying to the professionals. After a wonderful day at the Era Training Center, we returned to the car for a lengthy drive back to New Orleans.
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Site Visit Photo
Left to right: Benjamin Hulshoff, Austin King, Harrison Mona, Emma Culotta, Melanie Landry, Michael White
INDEPENDENT OUTSIDE RESEARCH
To better prepare for our site visit to Era Group’s training center in Lake Charles, our team reached out to several professionals who are familiar with the helicopter transportation services industry. We cold‐called analysts from Barclays, the directors of investor relations at Bristow Group and Era Group, and the Communications Director of the helicopter manufacturing company Sikorsky Aircraft, but we were unable to reach them. Finally, we tracked down the office of oil services and drilling analyst James C. West who had covered SEACOR and Era at Barclay’s before he moved to the International Strategy & Investment Group (ISI) in September 2014. Although Mr. West was unavailable for comment, we gained insight from a junior analyst in his department named Alexander Nuta.
Mr. Nuta spoke on behalf of himself and Mr. West when expressing the belief that the helicopter transportation services is a bullish market space and, as a result, that helicopter industries will benefit greatly from a further outward push in deepwater drilling. After an eighteen‐month period of moderated growth, deepwater development will increase demand for heavy helicopters, where Era currently falls short in supply compared to competitors. Mr. Nuta emphasized the importance of heavy helicopters in being able to demand premium service rates. With only nine heavy helicopters out of a total fleet size of 166, Era is not as well suited to benefit from the big deepwater reserves as its larger competitors like Bristow and CHC.
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When asked what he thought were Era’s greatest strengths, Mr. Nuta stressed Era’s position in a strong subsector of the oil and gas industry. Interestingly, he mentioned that, like its former parent company SEACOR, Era Group has strong management skills. The sudden resignation of Chief Executive Officer Sten Gustafson, however, could be a red flag for the Company if his departure is related to decreasing Company performance.
According to Mr. Nuta, besides its fleet size and composition, one of Era Group’s weaknesses is the fragmented nature of its international operations. Figure 9 displays the number of helicopters Era has placed in each country. Mr. Nuta argues that the low numbers in Latin America, Europe, and Asia make growing the economies of scale in international markets difficult for Era Group.
Figure 9: Era Group, Inc. Areas of Operation as of 6/30/2014
Source: Deutsche Bank Presentation September 30 2014
Jumping off the beaten path, we also reached out to employees at Tenbo Remote Aerial Imaging, a startup company in New Orleans that develops Unmanned Aerial Vehicles (UAVs) more commonly known as “drones”. We were fortunate enough to meet with David Locascio, Head of UAV Operations, to discuss the potential of drones entering the oil and gas services industry and whether that might affect companies like Era.
The non‐military drone industry is a new and rapidly growing market in the U.S., where currently over 100 companies operate. Non‐military drones are much smaller than military vehicles and do not currently have “sense and avoid” technology. These drones cost between $10,000 and $100,000 and are used for several purposes including surveying, mapping, farming, and filming. Despite their huge profit potential, the commercial use of drones is still prohibited because of the lack of regulations for this new industry.
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Once governments develop regulations, however, demand for drones will likely increase in markets like environmental protection, tracking, surveillance, and oil and gas services.
Mr. Locascio explained that the likelihood of drones encroaching upon a helicopter service provider’s market share is very low, though not out of the question, for at least the next 20 years. Instead of for human transport, drones will more likely be used to search for oil deposits and to inspect oilrigs and pipelines in the next ten years. This technology advance could lead to more efficient exploration and maintenance processes for oil companies, and Era may benefit from an overall industry improvement. Mr. Locascio also described an ongoing process involving drones and swarm robotics, a technology that programs collective behavior for a group of robots that interact with each other and their environment. Engineers are working to integrate swarm robotics in flight space to have drones communicate with each other in the air. This fascinating idea has the potential to change the way search and rescue missions operate by sending out hundreds of drones that have heat‐imaging technology to identify objects in water. In this way, drones could actually become direct competitors for helicopter services providers like Era Group.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
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ANOTHER WAY TO LOOK AT IT
ALTMAN Z‐SCORE
The Altman Z‐score is used to determine the likelihood that a company will go bankrupt. In 1968, an Assistant Professor of Finance at New York University, Edward I. Altman, derived the formula by adding several weighted ratios that are taken from the balance sheet. The calculated number is placed on a scale that determines the level of financial risk of any given company. Any number below 1.8 is considered very high risk, between 1.8 and 2.99 is considered a medium level of risk, and above 3 is considered safe from bankruptcy. Era Group’s Altman Z‐score as of September 30, 2014 is 0.722, signaling an elevated risk of default.
Era’s low Z‐score can be attributed to its business model. Companies that have a large amount of total assets generally have lower Z‐scores. Four out of the five ratios that factor into the Z‐score involve total assets as the denominator. Era’s large fleet of helicopters significantly increases the total assets of the company, thus creating a large denominator and a smaller quotient to be added to the Z‐score. The Altman Z‐score is not a great indicator of bankruptcy risk for Era because the Company needs to have a large amount of assets to generate revenue. Although a high total asset count is a possible indicator of high bankruptcy risk, Era must have an expanding helicopter fleet to be profitable.
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
30
PETER LYNCH EARNINGS MULTIPLE VALUATION
The Peter Lynch chart helps investors analyze the value of a stock price in relation to its earnings. Lynch created a theoretical price, called the “earnings line”, which represent a price at 15 times the earnings per share. Lynch posits that if a company’s stock price is selling below its earning line, then it is most likely a prudent purchase. If the stock is selling above its earnings line, then it is an imprudent purchase.
Figure 10 demonstrates the earnings to price relationship for Era Group, Inc. from its spinoff from Seacor Holdings, Inc. in January 2013 to the current date. At the current price of $25.28, Era Group is trading at 32X earnings. Peter Lynch would not purchase the Company at this time.
Figure 10: Era Group, Inc. Earnings to Price Relationship
Source: Guru.com 2014
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
31
WWBD? What Would Ben (Graham) Do? Ben Graham (May 8, 1894 ‐ September 21, 1976) was a British‐born American investor considered by many to be the father of value investing. As a professor at Columbia Graduate School of Business, Graham influenced some of today’s most successful investors, including renowned businessman Warren Buffett. Graham taught investors to be prudent and analytical when choosing their holdings. He designed a test made up of ten critical elements, or hurdles, to show investors how to find diamonds in the rough. For the purpose of our report, we examined Era Group’s financials for eight of the ten critical elements Graham used to identify value stocks. If a stock passed four out of eight hurdles, then Mr. Graham considered the stock attractive based on the qualities of consistent growth, potential for future growth, and a bargain price compared to company value.
Era Group currently passes three out of Ben Graham’s eight hurdles. 1) At $24.92, the Company’s stock price is well below 1.5X its book value per share of $23.09. 2) The total debt is less than the book value because Era has a high asset value thanks to its helicopters and a comparatively small amount of debt. 3) Era also has a current ratio of 2.6 thanks to its high current asset value and limited current liabilities.
Era failed to pass three out of the remaining five hurdles because of its age. Because Era split from SEACOR Holdings, Inc. on January 31, 2013, the Company does not have enough data to examine the P/E ratio, earnings growth, or stability in earnings growth going back five years. Furthermore, Era has never paid dividends to shareholders. Finally, Era fell short of an earnings to price yield of 2X the yield on the 10‐year Treasury. As a result, Era Group would not have passed Ben Graham’s test for a worthy investment.
Figure 11: Ben Graham Analysis
Era Group Incorporated (ERA) BURKENROAD REPORTS (www.burkenroad.org) November 18, 2014
32
Earnings per share (ttm) 0.77$ Price: 24.92$
Earnings to Price Yield 3.09%
10 Year Treasury (2X) 4.64%
P/E ratio as of N/A N/A
P/E ratio as of N/A N/A
P/E ratio as of N/A N/A
P/E ratio as of N/A N/A
P/E ratio as of 12/31/13 35.5
Current P/E Ratio 32.3
Dividends per share (ttm) ‐$ Price: 24.92$
Dividend Yield 0.00%
1/2 Yield on 10 Year Treasury 1.16%
Stock Price 24.92$
Book Value per share as of 9/30/14 0.02$
150% of book Value per share as of 9/30/14 0.03$
Interest‐bearing debt as of 9/30/14 280,177$
Book value as of 9/30/14 464$
Current assets as of 9/30/14 121,159$
Current liabilities as of 9/30/14 46,236$
Current ratio as of 9/30/14 2.6
EPS for year ended 12/31/13 0.87$
EPS for year ended N/A ‐$
EPS for year ended N/A ‐$
EPS for year ended N/A ‐$
EPS for year ended N/A ‐$
EPS for year ended 12/31/13 0.87$
EPS for year ended N/A ‐$
EPS for year ended N/A ‐$
EPS for year ended N/A ‐$
EPS for year ended N/A ‐$
Stock price data as of November 18, 2014
Hurdle # 6: Current Ratio of Two or More
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
Yes
N/A
N/A
Hurdle # 8: Stability in Growth of Earnings
Yes
Hurdle # 4: A Stock Price less than 1.5 BV
No
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
N/A
Yes
ERA Group Inc. (NYSE: ERA)
Hurdle # 5: Total Debt less than Book Value
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
No
Ben Graham Analysis
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
Era Group In
corporated (ER
A)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 18, 2014
33
ERA
Group Inc.
(NYSE:
ERA)
Quarterly and Annual
Earnings
In th
ousands
For the period ended
Operating revenues
Costs and expen
ses:
Operating
Administrative and general
Depreciation
Total costs and expenses
Gross
profit
Gains on asset
dispositions and im
pairm
ents, net
Operating income (loss)
Other income (e
xpense):
Interest
income
Interest
expen
se
2011A
258,148
$
162,707
31,893
42,612
237,212
2
58,148
2
58,148
2012 A
272,921
$
167,195
34,785
42,502
244,482
28,439
3,612
32,051
910
(1
0,648)
2013 A
31‐M
ar A
30‐Jun A
30‐Sep
A31‐Dec E
2014 E
31‐M
ar E
30‐Jun E
30‐Sep
E31‐Dec E
2015 E
298,959
$
79,443
$
86,580
$
90,510
$
85,269
$
341,802
$
84,247
$
91,525
$
96,091
$
90,201
$
362,064
$
186,612
49,640
54,679
54,282
52,441
211,042
51,602
56,059
58,856
55,248
221,764
38,924
11,334
10,065
12,941
11,085
45,425
10,952
11,898
12,492
11,726
47,068
45,561
11,287
11,425
11,746
11,873
46,331
12,189
12,269
12,430
12,592
49,479
271,097
72,261
76,169
78,969
75,399
302,798
74,742
80,226
83,777
79,566
318,311
27,862
7,182
10,411
11,541
9,870
39,004
9,505
11,299
12,314
10,635
43,753
18,301
2,891
3,139
42
4,500
10,572
4,500
4,500
4,500
4,500
18,000
46,163
10,073
13,550
11,583
14,370
49,576
14,005
15,799
16,814
15,135
61,753
591
145
143
130
310
728
175
139
75
71
459
(18,050)
(3,753)
(3,840)
(3,629)
(3,778)
(15,000)
(3,727)
(3,634)
(3,575)
(3,515)
(14,450)
2015 E
2014 E
SEACOR m
anagemen
t fees
Derivative
gains (losses),
net
Note
receivable
impairm
ent
Foreign currency
gains (losses),
net
Other,
net
Total other
Income (loss) b
efore
income ta
xes and noncontrolling interest
Income ta
x expen
se (b
enefit)
Current
Deferred
Total Taxes
Net income before
noncontrolling interest
Net income (loss) attributable
to noncontrolling interest
Income (loss) b
efore
equity in
earnings
(losses) o
f 50%
or less
owned companies
Equity earnings
(losses), n
et o
f tax
Net Income (loss)
Net Income (loss) a
ttributable
to noncontrolling interest
in is
subsidiary
Net Income (loss) a
ttributable
to Era
Group Inc.
Accretion of red
emption value on series A
preferred
stock
Net income (loss) attributable
to common shares
Net income (loss) p
er common share:
Basic
Net income (loss)
258,148
(2,000)
(490)
720
30
(11,478)
20,573
(51,213)
58,511
7,298
13,275
(5,528)
7,747
$
7,747
$
40
$
7,787
$
8,469
$
(682)
$
(0.03)
$
(168)
(104)
(30)
(11)
(1,703)
(1,744)
(2,457)
(2,457)
698
(57)
21
(485)
(521)
19
13
(3)
10
(17,014)
(3,695)
(6,131)
(5,690)
(3,468)
(18,984)
(3,552)
(3,495)
(3,500)
(3,444)
(13,991)
29,149
6,378
7,419
5,893
10,903
30,593
10,453
12,304
13,314
11,691
47,762
4,591
7,136
11,727
2,503
2,759
2,868.00
4,033.96
12,164
3,867.74
4,552.41
4,926.25
4,325.61
17,672
17,422
3,875
4,660
3,025
6,869
18,429
6,586
7,751
8,388
7,365
30,090
1,286
1,286
17,422
$
3,875
$
4,660
$
4,311
$
6,869
$
19,715
$
6,586
$
7,751
$
8,388
$
7,365
$
30,090
$
882
499
536
(45)
990
18,304
$
4,374
$
5,196
$
4,266
$
6,869
$
20,705
$
6,586
$
7,751
$
8,388
$
7,365
$
30,090
$
401
$
71
$
25
$
96
83
$
83
$
83
$
83
$
331
$
18,705
$
4,445
$
5,221
$
4,266
$
6,869
$
20,801
$
6,668
$
7,834
$
8,471
$
7,448
$
30,422
$
721
$
17,984
$
4,445
$
5,221
$
4,266
$
6,869
$
20,801
$
6,668
$
7,834
$
8,471
$
7,448
$
30,422
$
0.88
$
0.22
$
0.26
$
0.21
$
0.34
$
1.03
$
0.33
$
0.39
$
0.42
$
0.37
$
1.51
$
Net income (loss) e
xcluding non‐recurring items
Diluted
Net income (loss)
(0.03)
$
0.22
$
0.26
$
0.21
$
0.34
$
1.03
$
0.33
$
0.39
$
0.42
$
0.37
$
1.51
$
0.87
$
0.22
$
0.26
$
0.21
$
0.34
$
1.03
$
0.33
$
0.39
$
0.42
$
0.37
$
1.50
$
Net income (loss) e
xcluding non‐recurring items
0.22
$
0.26
$
0.21
$
0.34
$
1.03
$
0.33
$
0.39
$
0.42
$
0.37
$
1.50
$
Weighted average
shares
outstanding:
Basic
Diluted
24,500
24,500
20,489
20,218
20,342
20,098
20,110
20,110
20,134
20,157
20,180
20,202
20,202
20,489
20,554
20,398
20,164
20,170
20,170
20,194
20,217
20,240
20,262
20,262
Era Group In
corporated (ER
A)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 18, 2014
34
ERA
Group Inc.
(NYSE:
ERA)
SELECTED
COMMON‐SIZE AMOUNTS
(as %
of R
evenue)
2011A
2012 A
2013 A
31‐M
ar A
30‐Jun A
30‐Sep
A31‐Dec E
2014 E
31‐Mar
E30‐Jun E
30‐Sep
E31‐Dec
E2015 E
2015 E
2014 E
Operating Costs
Administrative and gen
eral
Gross
profit
Gains on asset
dispositions and im
pairm
ents, net
Operating income (loss)
63.03%
12.35%
n/a
n/a
n/a
61.26%
12.75%
10.42%
1.32%
11.74%
62.42%
62.49%
63.15%
59.97%
61.50%
61.74%
61.25%
61.25%
61.25%
61.25%
61.25%
13.02%
14.27%
11.63%
14.30%
13.00%
13.29%
13.00%
13.00%
13.00%
13.00%
13.00%
9.32%
9.04%
12.02%
12.75%
11.58%
11.41%
11.28%
12.35%
12.81%
11.79%
12.08%
6.12%
3.64%
3.63%
0.05%
5.28%
3.09%
5.34%
4.92%
4.68%
4.99%
4.97%
15.44%
12.68%
15.65%
12.80%
16.85%
14.50%
16.62%
17.26%
17.50%
16.78%
17.06%
Income (loss) b
efore
income taxes an
d noncontrolling interest
n/a
7.54%
9.75%
8.03%
8.57%
6.51%
12.79%
8.95%
12.41%
13.44%
13.86%
12.96%
13.19%
Income (loss) b
efore
equity in
earnings
(losses)
of 5
0%
or less
owned companies
YEAR TO
YEA
R CHANGE
Operating revenues
Operating Costs
n/a
9.68%
10.51%
2.84%
5.72%
2.76%
5.83%
4.88%
5.38%
4.76%
8.06%
5.77%
7.82%
8.47%
8.73%
8.17%
8.31%
9.54%
17.30%
16.63%
11.74%
12.20%
14.33%
6.05%
5.71%
6.17%
5.78%
5.93%
11.61%
15.13%
16.47%
5.73%
15.99%
13.09%
3.95%
2.52%
8.43%
5.35%
5.08%
Gains on asset
dispositions and im
pairm
ents, net
n/a
n/a
406.67%
n/a
‐29.87%
‐98.36%
869.83%
‐42.23%
n/a
43.36%
1061
4.29%
0.00%
70.26%
Income (loss) b
efore
income taxes an
d noncontrolling interest
9.68%
‐92.03%
41.69%
‐33.60%
11.16%
‐19.02%
94.93%
4.95%
63.90%
65.84%
125.93%
7.23%
56.12%
Income (loss) b
efore
equity in
earnings
(losses)
of 5
0%
or less
owned companies
n/a
n/a
124.89%
‐35.71%
8.98%
‐5.50%
168.62%
13.16%
69.95%
66.34%
94.57%
7.23%
52.63%
Era Group In
corporated (ER
A)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 18, 2014
35
ER
A Group Inc.
(NYSE:
ERA)
Quarterly and Annual
Balance
Sheets
In th
ousands
As of
Cash and cash equivalents
Trade receivab
les
Other
31‐Dec‐11 A
31‐Dec‐12 A
11,505
$
48,527
3,742
31‐Dec‐13 A
31‐M
ar A
30‐Jun A
30‐Sep
A31‐Dec E
31‐Dec‐14 E
31‐M
ar E
30‐Jun E
30‐Sep
E31‐Dec
E31‐Dec‐15 E
31,335
$
22,290
$
14,940
$
40,357
$
22,769
$
22,769
$
18,057
$
9,743
$
9,238
$
10,025
$
10,025
$
38,137
47,780
52,582
48,307
50,049
50,049
49,612
53,898
55,965
51,964
51,964
4,374
4,824
2,078
1,679
1,679
1,679
1,679
1,679
1,679
1,679
1,679
2015 E
2014 E
Inventories
Prepaid expen
ses &
other
current a
ssets
Deferred income taxes
Escrow
Dep
osits
Total curren
t assets
Property and Equipmen
t
26,650
1,803
3,642
96,840
26,853
26,780
26,863
27,039
26,790
26,790
26,947
29,275
30,398
28,225
28,225
2,167
3,292
2,991
1,712
3,000
3,000
3,000
3,000
3,000
3,000
3,000
2,347
2,138
1,991
2,065
2,065
2,065
2,065
2,065
2,065
2,065
2,065
3,048
105,213
110,152
101,445
121
,159
106,352
106
,352
101,361
99,660
102,344
96,956
96,956
Total property,
plant,
and equipmen
t
Accumulated dep
reciation
Property,
plant &
equipmen
t, net
of a
ccumulated dep
reciation
Investments
in equity,
and advances to
50%
or less
owned companies
Goodwill
Other
assests
Total assets
Curren
t liabilities:
Accounts
payab
le and accrued
expen
ses
Accrued
wages
and ben
efits
Accrued
interest
Curren
t maturities of long‐term
deb
t
Derivatives
Accrued
income taxes
1,030,276
(242,471)
787,805
34,696
352
17,871
937,564
$
15,703
$
4,576
2,787
1,066,958
1,084,199
1,116,678
1,128,510
1,158,875
1,158,875
1,173
,998
1,189,437
1,204,956
1,220
,636
1,220
,636
(263,306)
(273,754)
(284
,547)
(296,294)
(303,533)
(303
,533)
(311,221)
(318
,990)
(326,920)
(335,011)
(335,011
)
803,652
810,445
832,131
832
,216
855,342
855
,342
862,777
870
,447
878,036
885,624
885,624
34,986
35,433
36,053
31,641
31,641
31,641
31,641
31,641
31,641
31,641
31,641
352
352
352
352
352
352
352
352
352
352
352
14,380
16,074
15,868
14,794
14,642
14,642
14,489
14,337
14,184
14,032
14,032
958,583
$
972,456
$
985,849
$
1,000,162
$
1,008,329
$
1,008,329
$
1,010,620
$
1,016,436
$
1,026
,558
$
1,028,605
$
1,028,605
$
13,293
$
13,639
$
23,129
$
21,819
$
20,390
$
20,390
$
20,594
$
22,373
$
23,231
$
21,570
$
21,570
$
8,792
9,583
9,791
9,651
8,632
8,632
8,718
9,471
9,834
9,131
9,131
772
4,624
950
4,805
3,750
3,750
3,634
3,575
3,515
4,991
4,991
2,787
2,787
2,787
2,787
8,972
8,972
15,841
22,710
29,579
36,448
36,448
621
529
569
1,991
1,991
1,991
1,991
1,991
1,991
1,991
1,991
613
781
236
1,029
1,029
1,029
1,029
1,029
1,029
1,029
1,029
Other
curren
t Liabilities
Total curren
t liabilities
Long‐term
deb
t, less
curren
t maturities
Deferred income taxes
Deferred gains and other
liab
ilities
Total liabilities
Stockholders' equity:
6,633
29,699
276,948
203,536
7,864
518,047
3,267
4,171
4,258
4,154
4,154
4,154
4,154
4,154
4,154
4,154
4,154
30,145
36,114
41,720
46,236
48,918
48,918
55,960
65,302
73,333
79,313
79,313
279,391
278,755
278,023
277
,390
270,509
270
,509
256,759
243
,009
234,259
220,509
220,509
209,574
211,479
214,117
216
,985
221,968
221
,968
223,867
225
,826
227,764
229,702
229,702
3,412
3,476
3,120
2,898
2,898
2,898
2,898
2,898
2,898
2,898
2,898
522,522
529,824
536,980
543
,509
544,294
544
,294
539,484
537
,035
538,254
532,422
532,422
Class
A common stock
202
203
204
204
204
204
204
204
204
204
204
Additional
paid‐in capital
Retained earnings
(accumulated deficit)
Treasury
Shares,
at cost
Accumulated other
comprehensive
loss
Noncontrolling interest
in subsidiary
Total stockholders'
equity
T otal liabilities
and stockholders' equity
278,838
(4,025)
20
207
419,517
937,564
$
421,310
423,728
425,010
428
,530
429,044
429
,044
429,559
430
,073
430,587
431,101
431,101
14,680
19,125
24,346
28,612
35,481
35,481
42,149
49,983
58,454
65,902
65,902
(113)
(334)
(547)
(547)
(547)
(547)
(547)
(547)
(547)
(547)
(547)
176
175
146
99
99
99
99
99
99
99
99
(194)
(265)
(290)
(245)
(245)
(245)
(328)
(411)
(494)
(576)
(576)
436,061
442,632
448,869
456
,653
464,036
464
,036
471,136
479
,402
488,304
496,183
496,183
958,583
$
972,456
$
985,849
$
1,000,162
$
1,008,330
$
1,008,330
$
1,010,620
$
1,016,436
$
1,026
,558
$
1,028,605
$
1,028,605
$
SELECTED
COMMON
SIZE BALANCE SH
EET AMOUNTS
(% of n
et sales)
Trade receivab
les
17.78%
12.76%
60.14%
60.73%
53.37%
58.70%
14.64%
58.89%
58.89%
58.24%
57.61%
14.35%
Inventories
Prepaid expen
ses &
other
current a
ssets
9.76%
0.66%
8.98%
33.71%
31.03%
29.87%
31.42%
7.84%
31.99%
31.99%
31.63%
31.29%
7.80%
0.72%
4.14%
3.45%
1.89%
3.52%
0.88%
3.56%
3.28%
3.12%
3.33%
0.83%
Property,
plant &
equipmen
t, net
of a
ccumulated dep
reciation
288.66%
268.82%
1020.16%
961.11%
919.47%
1003.11%
250.24%
1024.10%
951.05%
913.76%
981.83%
244.60%
Accounts
payab
le and accrued
expen
ses
5.75%
4.45%
17.17%
26.71%
24.11%
23.91%
5.97%
24.44%
24.44%
24.18%
23.91%
5.96%
SELECTED
COMMON
SIZE BALANCE SH
EET AMOUNTS
(% of total assets)
Total curren
t assets
10.33%
10.98%
11.33%
10.29%
12.11%
10.55%
10.55%
10.03%
9.80%
9.97%
9.43%
9.43%
Property,
plant &
equipmen
t, net
of a
ccumulated dep
reciation
84.03%
83.84%
83.34%
84.41%
83.21%
84.83%
84.83%
85.37%
85.64%
85.53%
86.10%
86.10%
Total curren
t liabilities
Long‐term
deb
t, less
curren
t maturities
Deferred income taxes
Total liabilities
3.17%
29.54%
21.71%
55.25%
3.14%
3.71%
4.23%
4.62%
4.85%
4.85%
5.54%
6.42%
7.14%
7.71%
7.71%
29.15%
28.67%
28.20%
27.73%
26.83%
26.83%
25.41%
23.91%
22.82%
21.44%
21.44%
21.86%
21.75%
21.72%
21.69%
22.01%
22.01%
22.15%
22.22%
22.19%
22.33%
22.33%
54.51%
54.48%
54.47%
54.34%
53.98%
53.98%
53.38%
52.84%
52.43%
51.76%
51.76%
Additional
paid‐in capital
29.74%
43.95%
43.57%
43.11%
42.85%
42.55%
42.55%
42.50%
42.31%
41.94%
41.91%
41.91%
Total stockholders'
equity
44.75%
45.49%
45.52%
45.53%
45.66%
46.02%
46.02%
46.62%
47.16%
47.57%
48.24%
48.24%
Era Group In
corporated (ER
A)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 18, 2014
36
ERA
Group Inc.
(NYSE:
ERA)
Quarterly and Annual
Statemen
ts of C
ash Flows
In th
ousands
For the period ended
Cash Flow
From
Operations:
Net income including noncontrolling interest(loss)
Adjustmen
ts:
Dep
reciation
Amortization of d
eferred
finan
cing costs
Share based compen
sation
Deb
t discount a
mortization
Bad
deb
t expense, n
et
Gains on asset
dispositions and im
pairm
ents, net
Derivative losses, net
Cash settlem
ents
on derivative tran
sactions,
net
Foreign curren
cy (g
ains)
losses,
net
Deferred
income tax expense
Non‐cash settlem
ent o
f curren
t tax
ben
efit
Equity in
(earnings) losses
of 5
0%
or less
owned
companies,
net
of tax
Dividends received from
50%
or less
owned companies
Chan
ges in
operating assets
and liabilities:
Receivables
Prepaid expenses and other
assets
Accounts
payable, accrued
expen
ses and other
liabilities
Net cash provided
by (used in) o
perating activities
Cash flows from
investing activities
Purchases
of p
roperty, plant a
nd equipment
Proceeds from
dispositition of p
roperty
and equipment
Cash settlem
ents
on derivative tran
sactions,
net
Investmen
ts in
and advances to
50%
or less
owned companies
Proceeds from
sale of interest
in equity investees
Principal
payments
on notes due from
equity investees
Escrow
deposits, net
(Advances)
principal
payments
on th
ird party
notes receivab
le, net
Net cash used in
investing activities
Cash flows from
finan
cing activities
(Payments
to) a
dvances from
SEA
COR, net
Proceeds from
issuance
of long‐term
deb
t
Credit
faciltiy
borrowing,
net
Long‐term
deb
t issuance
costs
Payments
on Long‐term
deb
t
Revolving Credit
Facility
issuance
costs
Issuance
of series
B preferred
stock
Settlement o
f series B preferred stock
Dividends paid on series A
preferred
stock
Exercise of stock
options
Proceeds from
Employee Stock
Purchase Plan
Proceeds and ta
x benefits from
share aw
ard plans
Proceeds from
SEA
COR on th
e settlemen
t of stock
options
Net cash provided
by (used in) financing activities
Effects of e
xchange
rate changes on cash and cash equivalents
Increase
(decrease) in cash and cash equivalents
Cash and cash equivalents
at b
eginning of year
Cash and cash equivalents
at e
nd of year
2011A
2012 A 7,747
$
42,502
1,663
15
2,798
(3,612)
490
(419
)
(720
)
58,511
(50,000)
5,528
(16)
320
(2,153)
(48,739)
13,915
(112,986)
5,188
(10,627)
2,574
1,086
(114,765)
284,622
(4,754)
(292,787)
100,000
(50,000)
(4,447)
32,634
599
(6
7,617)
79,122
11,505
2013 A
31‐M
ar A
30‐Jun A
30‐Sep
A31‐Dec E
2014 E
31‐Mar
E30‐Jun E
30‐Sep
E31‐Dec
E2015 E
18,304
$
6,86
9$
20,705
$
6,586
$
7,751
$
8,388
$
7,365
$
30,090
$
45,561
11,873
11,87
3
12,189
12,269
12,430
12,592
49
,479
610
153
153
153
153
153
153
610
1,815
450
450
450
450
450
450
1,800
231
885
242
242
250
248
269
280
1,048
(18,301)
104
(478)
(698)
7,136
4,984
4,984
1,899
1,959
1,938
1,938
7,733
(882)
9,668
(1,984)
(1,984)
187
(4,534)
(2,337
)
3,722
(2,962)
1,250
(1,039)
(1,039)
(157)
(2,328)
(1,123
)
2,173
(1,434)
(834)
(3,503)
(3,503)
173
2,473
1,162
(889)
2,919
64,371
9,678
21,605
30,683
18,044
80,01
0
21,728
18,441
21,330
27,783
89
,283
(110,105
)
(18,751)
(33,382)
(11,833)
(35,000)
(98,966
)
(19,623)
(19,939)
(20,019)
(20,180)
(79,761)
65,151
3,566
3,412
42
7,020
(125)
(125)
6,381
6,381
863
161
163
150
474
(3,048)
3,048
632
36
237
151
424
(43,459)
(18,036)
(26,522)
(5,234)
(35,000)
(84,792
)
(19,623)
(19,939)
(20,019)
(20,180)
(79,761)
55,000
5,000
5,000
(52,788)
(697)
(794)
(696)
(696)
(2,883)
(6,881)
(6,881)
(6,881
)
(6,881)
(27,524)
(2,393)
(53)
(2,446)
(4,953)
320
320
516
622
64
1,202
64
64
64
64
257
527
13
(13)
706
(1,508)
(684)
(2,364)
(127)
(632)
(3,807)
(6,817)
(6,817)
(1,817
)
(6,817)
(22,267)
426
(3)
(69)
95
23
$
19,830
(9,045)
(7,350)
25,417
(17,588)
(8,566)
(4,712)
(8,314)
(505)
787
(12,745)
11,505
31,335
22,290
14,940
40,357
31,33
5
22,769
18,057
9,743
9,238
22
,769
31,335
22,290
14,940
40,357
22,769
22,76
9
18,057
9,743
9,238
10,025
10
,025
2014 E
2015 E
excluding chan
ges in
working capital
including chan
ges in
working capital
0.57
$
0.57
$
3.14
$
0.89
$
1.58
$
1.08
$
0.91
$
1.05
$
1.37
$
4.41
$
3.14
$
0.47
$
1.06
$
1.52
$
0.89
$
3.97
$
1.08
$
0.91
$
1.05
$
1.37
$
4.41
$
Era Group In
corporated (ER
A)
BURKEN
ROAD REP
ORTS (www.burken
road
.org)
November 18, 2014
37
ERA
Group Inc.
(NYSE:
ERA)
Ratios For the period ended
Productivity Ratios
Receivables turnover
2012 A
N/A
2013
A31‐M
ar A
30‐Jun A
30‐Sep
A31
‐Dec
E2014 E
31‐M
ar E
30‐Jun E
30‐Sep E
31‐Dec
E20
15 E
6.90
1.85
1.73
1.79
1.73
7.75
1.69
1.77
1.75
1.67
7.10
2015 E
2014
E
Inventory
turnover
N/A
6.98
1.85
2.04
2.01
1.95
7.87
1.92
1.99
1.97
1.88
8.06
Working capital
turnover
N/A
4.20
1.07
1.29
1.34
1.29
5.16
1.64
2.30
3.03
3.87
9.65
Net
fixed asset
turnover
N/A
0.38
0.10
0.11
0.11
0.10
0.41
0.10
0.11
0.11
0.10
0.42
Total asset
turnover
N/A
0.32
0.08
0.09
0.09
0.08
0.35
0.08
0.09
0.09
0.09
0.36
# of d
ays Sales in
A/R
6547
54
55
49
54
5353
54
5453
52
# of d
ays Cost
of Sales
in Inventory
5853
49
45
46
47
4647
48
4847
46
e# of d
ays Cash‐based
expen
ses in
payables
2619
18
30
27
26
2626
27
2727
26
Liquidity Measures
Curren
t ratio
3.26
3.49
3.05
2.43
2.62
2.17
2.17
1.81
1.53
1.40
1.22
1.22
Quick ratio
2.02
2.30
1.94
1.62
1.92
1.49
1.49
1.21
0.97
0.89
0.78
0.78
Cash ra
tio
2.02
2.30
1.94
1.62
1.92
1.49
1.49
1.21
0.97
0.89
0.78
0.78
Cash flow
from
operations ratio
0.47
2.14
0.27
0.52
0.66
0.37
1.64
0.39
0.28
0.29
0.35
1.13
Working capital
67,141
75,068
74,038
59,725
74,923
57,434
57,434
45,401
34,358
29,011
17,643
17,643
Financial
Risk (Leverage)
Ratios
Debt/equity ratio (e
xcluding deferred ta
xes)
0.75
0.72
0.72
0.72
0.72
0.69
0.69
0.67
0.65
0.64
0.61
0.61
Total LT deb
t/eq
uity ratio
1.16
1.13
1.12
1.10
1.09
1.07
1.07
1.03
0.98
0.95
0.91
0.91
LT deb
t/eq
uity (excluding deferred
taxes)
0.68
0.65
0.64
0.63
0.61
0.59
0.59
0.55
0.51
0.49
0.45
0.45
Interest
coverage
ratio (E
arnings
= EBIT)
‐21.61
‐48.32
‐42.99
‐50.88
‐44.33
‐34.17
‐41.02
‐58.76
‐87.70
‐176.89
‐163.74
‐102.96
Interest
coverage
ratio (E
arnings
= EBI)
‐21.61
‐48.32
‐42.99
‐50.88
‐44.33
‐34.17
‐41.02
‐58.76
‐87.70
‐176.89
‐163.74
‐102.96
Total deb
t ratio
0.55
0.55
0.54
0.54
0.54
0.54
0.54
0.53
0.53
0.52
0.52
0.52
Debt ratio
(excuding deferred
taxes)
0.43
0.42
0.42
0.42
0.42
0.41
0.41
0.40
0.39
0.39
0.38
0.38
Profitability/Valuation M
easures
Gross
profit m
argin
10.42%
9.32%
9.04%
12.02%
12.75%
11.58%
11.41%
11.28%
12.35%
12.81%
11.79%
12.08%
Operating profit m
argin
11.74%
15.44%
12.68%
15.65%
12.80%
16.85%
14.50%
16.62%
17.26%
17.50%
16.78%
17.06%
Return
on assets
N/A
2.19%
0.48%
0.57%
0.52%
0.81%
2.38%
0.77%
0.89%
0.96%
0.84%
3.46%
Return
on equity
N/A
4.07%
0.88%
1.05%
0.95%
1.49%
4.38%
1.41%
1.63%
1.73%
1.50%
6.27%
Earnings
before
interest
margin
7.20%
9.55%
7.85%
8.40%
6.37%
12.42%
8.74%
12.20%
13.29%
13.78%
12.88%
13.06%
EBITDA
margin
22.78%
24.79%
7.85%
8.40%
6.37%
26.35%
12.21%
26.67%
26.70%
26.71%
26.84%
26.73%
EBITDA/Assets
N/A
15.46%
0.65%
0.75%
0.60%
2.28%
8.28%
2.27%
2.44%
2.53%
2.38%
18.82%
THIS PAGE LEFT INTENTIONALLY BLANK
BURKENROAD REPORTS RATING SYSTEM
MARKET OUTPERFORM: This rating indicates that we believe forces are in place that would enable this company's stock to produce returns in excess of the stock market averages over the next 12 months.
MARKET PERFORM: This rating indicates that we believe the investment returns from this company's stock will be in line with those produced by the stock market averages over the next 12 months.
MARKET UNDERPERFORM: This rating indicates that while this investment may have positive attributes, we believe an investment in this company will produce subpar returns over the next 12 months. BURKENROAD REPORTS CALCULATIONS
CPFS is calculated using operating cash flows excluding working capital changes.
All amounts are as of the date of the report as reported by Bloomberg or Yahoo Finance unless otherwise noted. Betas are collected from Bloomberg.
Enterprise value is based on the equity market cap as of the report date, adjusted for long‐term debt, cash, & short‐term investments reported on the most recent quarterly report date.
12‐month Stock Performance is calculated using an ending price as of the report date. The stock performance includes the 12‐month dividend yield.
2014‐2015 COVERAGE UNIVERSE Amerisafe Inc. (AMSF) Bristow Group Inc. (BRS) The First Bancshares (FBMS) CalIon Petroleum Company (CPE) Cal‐Maine Foods Inc. (CALM) Carbo Ceramics Inc. (CRR) Cash America International Inc. (CSH) Conn's Inc. (CONN) Crown Crafts Inc. (CRWS) Cyberonics Incorporated (CYBX) Denbury Resources Inc. (DNR) EastGroup Properties Inc. (EGP) Era Group Inc. (ERA) Evolution Petroleum Corp. (EPM) Globalstar (GSAT) Gulf Island Fabrication Inc. (GIFI) Hibbett Sports (HIBB) Hornbeck Offshore Services Inc. (HOS) IBERIABANK Corp. (IBKC) ION Geophysical Corp. (IO)
Key Energy Services (KEG) Marine Products Corp. (MPX) MidSouth Bancorp Inc. (MSL) Newpark Resources Inc. (NR) PetroQuest Energy Inc. (PQ) Popeyes Louisiana Kitchen (PLKI) Pool Corporation (POOL) Powell Industries Inc. (POWL) Rollins Incorporated (ROL) RPC Incorporated (RES) Ruth’s Hospitality Group Inc. (RUTH) Sanderson Farms Inc. (SAFM) SEACOR Holdings Inc. (CKH) Sharps Compliance Inc. (SMED) Stone Energy Corp. (SGY) Sunoco LP (SUN) Superior Energy Services Inc. (SPN) Team Incorporated (TISI) Vaalco Energy Inc. (EGY) Willbros Group Inc. (WG)
PETER RICCHIUTI Director of Research Founder of Burkenroad Reports [email protected] ANTHONY WOOD Senior Director of Accounting [email protected]
JERRY DICOLO DAVID DOWTY ELLIOTT EDWARDS Associate Directors of Research
BURKENROAD REPORTS Tulane University New Orleans, LA 70118‐5669 (504) 862‐8489 (504) 865‐5430 Fax
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