CHC To Acquire Babcock's Oil & Gas Aviation Business

CHC have a long history of making key acquisitions in the offshore oil and gas market, often during challenging times for the business or indeed the company itself. On Thursday 11th March 2021, CHC announced it would acquire Babcock’s Offshore Oil & Gas aviation business consisting of 29 active helicopters working in the UK, Denmark and Australia. We take a look at what this means for Aberdeen (the world’s busiest heliport) and the wider market and speak to renowned industry stalwart Dr Clark McGinn who has decades of experience in helicopter financing with Royal Bank of Scotland, and was Managing Director for CHC Leasing and SVP of Sales at Waypoint. He is also a highly regarded academic, published author and international public speaker.

BABCOCK TO EXIT OFFSHORE OIL & GAS… SUBJECT TO APPROVAL!

Babcock have announced that they have provisionally agreed to sell their offshore oil & gas business to CHC for an undisclosed amount. The deal is expected to complete in Q2, 2021 and Babcock note that this is subject to “third party conditions” (likely to include terms / approvals required in aircraft leases).

CHC TO BECOME THE LARGEST OFFSHORE CREW TRANSFER OPERATOR IN SCOTLAND AND THE LARGEST H175 OPERATOR GLOBALLY

Babcock have been looking for an exit from their offshore oil and gas business for a while and it is thought that the previous attempts to sell had failed for various reasons including loss of key contracts during the sales process. During 2020, Babcock repeatedly stated they wanted out of the sector. They remained active in tendering however and won contracts last year in UK, Denmark and Australia, taking business from CHC, NHV and Bristow.

For CHC, this is an important acquisition and in the UK North Sea it takes the number of rotorcraft operators at Aberdeen from 4 to 3. CHC will (post transaction) operate the largest fleet of crew transfer helicopters in Scotland. There is a significant scope for cost saving in Aberdeen, which will no doubt be a key part of the deal rationale (allowing CHC to operate Babcock’s current contracts more profitably) albeit this will mean a material change (consolidation) in ground operations in Aberdeen.

With NHV leasing aircraft to OMNI in Brazil (as explained by Steffen Bay in our previous piece) the combined CHC and Babcock entity will become the largest operator of Airbus H175 rotorcraft.

A VIEW FROM DR CLARK MCGINN

Clark - from a fleet management perspective this is an interesting deal, right? How do you think this will have been structured?

“What we saw in Babcock’s latest UK statutory accounts was further write-downs on contract values, but also there was a write-down on onerous lease costs, so Babcock have been whittling that cost delta down over the years and I guess to the point where CHC is going to be buying the overall business with that factored in the price.“

John Reynolds wrote an incredible account of the early years at CHC which I was reading at Christmas… some of it is just astonishing….

“I read it on a flight back from Vancouver when I was at RBS and I thought… “I’m going to burn this before the Head of Credit reads it!!”

Craig Dobbin – what a man, what a man!”

Right! What do you think he would make of this, it’s right out of his playbook isn’t it? When times are tough and back against the wall, it was the classic CHC play to acquire a major competitor?!

“Yep, classic strategy and that all got confused subsequently with the Chapter 11 events, that all created silos and there were people trying to split businesses in certain ways, such as selling PHI Air Medical to another big EMS player, those really transformative moves needed someone like Craig Dobbin to say “I can do this” but what happened was that loads of people (including me!) came up with various strategies to do such things, but it was difficult to get things aligned and ultimately it was hard enough to get CHC and the others out of bankruptcy let alone doing something much bigger. I think if Craig Dobbin were here he would have tried to do something before the Chapter 11 events… Bristow, PHI each had a year sliding into Chapter 11 in which they could have done something.

Maybe we have finally reached the point where people are realising that undercutting, undercutting, undercutting… you can’t trade your way out by adding more negative margin!!!

You look elsewhere and the Bristow / Era deal was great for the US Gulf but didn’t address overcapacity in other major markets: indeed Brazil on the other hand saw  ‘deconsolidation’ with  Bristow’s exit from Lider and now  Aeróleo (renamed Bristow Brazil) and CHC compete with Lider and OMNI. Too many mouths to feed in one market.

Maybe the industry structure will ultimately be addressed piecemeal in each of the major geographies? CHC buying Babcock certainly helps in the North Sea and the horrendous Australian market.”

Do you think Chapter 11 was ultimately an “easy way out” as has been suggested by some of the European operators? Not to suggest that the process was in any way ‘easy’ but at least they got the chance to renegotiate debt, lease rates etc.? The European guys had to ‘suck it up’, in contrast?

“Yes and the unionised Western European workforce is a totally different thing to the ‘hire at will’ situation that you’ve got in the USA. With something like this… you’ve got a relative pilot shortage and that limits what you can do in terms of costs there so ultimately you’re left with the only option of taking the axe to head office. To be honest with you, I think the office costs, running costs, managements costs, all of that will go and for the business at least that’s a small positive at a time where it’s hard to increase the margin against the oil companies. That’s step one, then step two is the effect of taking out one competitor.”

When it comes to Brazil, CHC haven’t done well in the latest tenders – are they better off out of it?

“CHC had 15 good years there. With OMNI coming in there’s a totally different dynamic, they’ve got a small team, very low fixed costs, very commercially aggressive… CHC had to either double up or double down…. Looks like they did the latter. I don’t see they had any alternative… what’s the point in hanging on to half a dozen 92s in the hope that something comes up in country?.”

This one is yet to complete of course but you were involved with CHC back in the day with RBS – what was it like when the First Reserve transaction completed during the financial crisis?

“The CHC acquisition by First Reserve closed on the day that Lehman Brothers went bust! As a function of the mechanics, RBS was the agent for CHC’s biggest syndicate…. The money had to physically leave the bank and come back to renew the leases… and so we had to send $1.2 billion out into the banking system by 11am in the morning. Together with my ‘no. 2’ we decided the only thing we could do was to go down to Corney & Barrow and get a bottle of wine and just sit and wait there and hope the money would come back by 3pm!

The two things that really impacted the industry then: after the takeover, CHC had to mark all its helicopters to market, right at a low point, and that dragged down the industry valuations and simultaneously banking liquidity came down rapidly too, and people were stuck with fleet they couldn’t sell, they couldn’t re-finance… It took about 15-18 months and it started hauling back up. Here, I think we’re just about that point (recovery) now… and it’s taken a lot longer. This time round with the oil price dynamic, it’s a different kettle of fish, but its analogous and whilst we still have aircraft parked and so on we are seeing the same thing, the market coming back albeit on a much slower trajectory.”

Right, its taken a lot lot longer this time. But I guess this week we’ve seen Brent hitting $70. The American shale story really didn’t deliver for the people that poured money into it so is now the chance for offshore to really shine again?

”Well, if you look at Bristow’s approach, they sold off the old aircraft, sorted out their fleet mix, did some refinancing. You have a fair chance at running a business if you do that. There’s still problems, but if you’ve taken the pain already, a bit like Fiennes the explorer taking a chisel to his own toes, chopped them off, horrible to do, but you’re alive afterwards. If you look at NHV, OMNI, Lider, Heli-Union and some others … the middle-sized professional guys are doing well but the larger guys are yet to really deliver to the people that thought they bought them at the bottom.

There’s plenty going on and a good number of contracts coming up both in terms of oil and gas but also several significant SAR contracts. Whilst there’s always things that can go wrong, 2021 might well see a few reasonably-sized positive stories coming out. However, further consolidation remains key.”

On a different note entirely, did you get to enjoy Burns night?

“I did actually, thank you for asking, I did three virtual ones, it was really good, worked really well. As a fundraiser for the University of Glasgow I normally do four a year, three in the USA, one in London and It was funny, one of the positives was that we did a virtual one where it was remarkable - we had over 800 alumni from 35 different countries. We were talking afterwards… this could be augmented as part of the events next year, there’s no reason why not and I think we’re going to see that actually in aviation also – the online conferences continue alongside the physical ones.”

Sincere thanks to Clark for his time and insight.