Dain on OLOG:
OLOG:SB-Avg;STRONG 4Q01 RESULTS; RAISING ESTIMATES AND PRICE TARGET
Strong Gulf Of Mexico Activity Leads To Pricing Increase: Effective June
1, Offshore Logistics implemented a 25% price increase across its aircraft
fleet in the Gulf of Mexico. This is on top of the 6% price increase
announced in January. The full impact of the price increase will not be
realized until the end of calendar 2001 due to the varying length of
contracts.
While at first blush these price increases appear large, the Gulf of Mexico
aviation market has historically been the pricing laggard in the offshore
industry. This price increase is really more of a catch-up increase to cover
operating cost growth for several years. Margins declined over most of the
1990s since operating cost increases were not successfully recovered through
pricing. Management estimates that the two price increases this year are
roughly equal to the collective price increases of the 1990s.
But Much Of The 4Q01 Result Was From Flight Hours And Mix: Domestic
flight hours were up nearly 28% vs. the year-ago quarter while revenues were
up 38% vs. 4Q00. Sequentially, flight hours were down slightly (a typical
pattern in this sector since weather tends to cause operators to cut back
some discretionary flying), but revenues were up approximately 3% since the
larger, higher-revenue-per-flight-hour crew change aircraft do not see much
of a seasonal downturn. Flight hours in May were up approximately 14% from
March levels, signaling much higher revenues for 1Q02. Currently in the
region, Offshore Logistics is running 114 aircraft on full-time charters, an
all-time high, and virtually at full capacity.
North Sea Seeing Flight Activity Improve: Bristow, Offshore Logistics'
North Sea affiliate, is also operating close to maximum capacity during early
1Q02. The company's flight hours decreased 8% in 4Q01 vs. 3Q01 due to the
normal seasonal decline in activity. However, in May, Bristow saw an uptick
in activity as the normal upturn in drilling activity began in the North Sea.
Margins were up substantially from activity, pricing, and recent
organizational changes (2.6% in 4Q01 vs. -2.1% in 4Q00).
Other International Markets Also Strengthening: International flight
hours have increased approximately 35% from year-ago levels, primarily driven
by Mexico. West Africa and Latin America hold strong potential for future
growth due to deepwater programs. The Middle East deepwater market has
several impressive discoveries that could also require more aircraft.
Offshore Logistics currently operates in Mexico, China, Trinidad, and Latin
America.
We believe there is a case for further price improvements. The average
age of Offshore Logistics' Gulf of Mexico fleet is more than 20 years,
probably not much different than most of the other competitors in the market.
According to the company, the used aircraft market has become small, with few
units suitable for service in energy. As such, the fleet will likely need to
be replaced with new aircraft. While certain types of aircraft become
economical to replace at these levels, the more bread and butter aircraft and
the very large crew-change aircraft could need much better margins for a
satisfactory return on investment.
This recent price increase could be the first step of several further--
although not nearly as large--improvements in pricing. In the early 1990s
(when the company derived most of its revenues from the Gulf of Mexico),
Offshore Logistics generated operating income margins of approximately 23%,
exclusive of the seasonally weak March quarter. The early 1990s were not an
era of significant new aircraft purchases, indicating that this was probably
not replacement cost pricing then. Our 2003 Air Logistics (Gulf of Mexico)
forecast is approximately 3% points lower than the level of the early 1990s.
Each 1% increase of operating income margin, on Gulf of Mexico business only,
could add $0.05 to our fiscal 2003 estimate. Any better margins
internationally could expand that leverage.
Stock Opinion
We are increasing our price target to $36 from $31 based on 14x our revised
fiscal 2003 EPS estimate, consistent with where the stock traded during the
last cycle. However, the historical multiple on OLOG shares is significantly
lower than what the more price-sensitive offshore service stocks typically
trade at during the early part of sustained price increases. We think
investors historically understood the value side of an investment in OLOG
shares but would not pay a higher multiple because they felt there was little
operating leverage other than flight hours. If our thesis of further pricing
is true, investors might be willing to pay a higher multiple on OLOG shares
as the earnings leverage accelerates, indicating a potential to exceed our
$36 price target. We reiterate our Strong Buy-Average rating. |
