CHC G-EMEA - a spotlessly clean Airbus H175 taxis at Aberdeen prior to departure to Equinor’s Mariner field on March 11th, 2020.
This is a cyclical industry and it always has been. Make hay whilst sun shines, right? The problem is that it has been a long while since any divine entity decided to point sunshine in the general direction of the offshore rotorcraft business. Whilst oil majors enjoyed a return to substantial positive free cash flow after the downturn of 2015/16, much of the oilfield services industry did not. With excess capacity and extreme pricing pressure, debt-laden offshore rotorcraft operators hit the wall. All of the top three global offshore rotorcraft operators have been through Chapter 11 proceedings since 2016. With strengthened balanced sheets they have returned but in some cases have still struggled to operate profitably. Without the benefit of several prior years of good trading (as was the case in 2015) how will they fare in this crisis?
Why Worry?
If you’re a fan of Hollywood action films or indeed if you have owned an old Fiat Punto that developed an earth fault you will have seen the classic ‘Christmas tree’ effect where all the warning lights go off at once. ‘Dashboards’ are often virtual and displayed on computer screens in modern times, and we like to watch the numbers to take comfort that all is well, or to know that corrective action is required.
March 2020 was when all the warning lights illuminated for the offshore rotorcraft operators. Suddenly, a number of problems:
How do we continue to operate safely amid a global pandemic?
How do we keep our crews safe?
How do we keep our passengers safe?
How do we transport ill passengers and get them to treatment without endangering others?
Will our supply chains function? Will we still get spare parts for our aircraft?
Will our customers still need our services? Will the platforms be shut in? What does “minimum manning” look like in terms of crew transfer?
Are our customers still creditworthy? What happens if they can’t pay or they cease trading?
What does demand look like in the near future? Longer term - What does a post Covid-19 world look like? Do we need to adapt?
The response of offshore helicopters operators to the immediate pressing concerns of safe operations was rapid, reassuring and full credit to them. We had a new term for our dictionary… the ‘coronacopter’ - passengers could be lifted from offshore platforms and taken to safety on specially-configured aircraft. Barriers between crew and passengers were developed and implemented (in a very short time period) and distribution of passengers relative to crew was adjusted on many aircraft to keep crews safe.
Phew. A lot of hard work from a lot of talented people ensured that people could still fly offshore and still fly safely. This is an adaptable and remarkable industry.
Next… the macroeconomic problems and implications for crew transfer… was the oil industry about to collapse? Would OPEC save the day? Over a protracted series of negotiations the 10 million bpd cut was agreed and rolled out and whether the actual number was 10 or 9.7 or something else was beside the point. OPEC, despite an unprecedented magnitude of production cut, were left holding a pea-shooter at a gunfight…. but what could they do in the face of global demand destruction estimated at 20-30 million bpd in April? Oil storage suddenly started looking rather full, spooking traders that (faced with the prospect of being physically unable to take delivery of oil at the end of the month) decided to cut and run, offloading trades at negative prices. Oil prices hit negative 37 dollars at one point on Monday 20th April.
Oil companies, having already thrown their 2020 capex plans into the shredder, frantically looked at what else they could do. As “earnings season” approached there was speculation that as Q1 results were announced there might be historic cuts to dividends from oil majors. BP held firm but Shell stunned the market days later by cutting their dividend for the first time since World War II.
Offshore Rotorcraft - It Never Rains…
If March had been about adjusting to the new normal, reallocating people offshore and bringing people home, April was when the brutal reality really hit home. Rotorcraft activity in the heavy and super-medium segments is materially down and has been throughout April with the last three weeks seeing global activity down between 26 and 29% in terms of no. of flights vs the year prior. The UK, having weathered March substantially better than the rest of the world, saw activity levels down over 30% in mid-late April.
Global % Change in No. of Flights per Week - Heavy & Super Medium Rotorcraft (to May 1st 2020)
UK % Change in No. of Flights per Week - Heavy & Super Medium Rotorcraft (to May 1st 2020)
Bristow goes into this crisis mid-merger with Era. As Chris Bradshaw outlined at Helicopter Investor conference in February this year, the merger is expected to deliver further efficiencies and a profitable entity. The deal is due to complete later in the year and the market will no-doubt watch with continuing interest. PHI, also fresh from exiting Chapter 11 in September 2019, spoke earlier this year of a ‘more selective’ approach to business but in a smaller market that will be a tough strategy to pursue. CHC’s much discussed ‘path to profitability’ almost certainly doesn’t have a global economic catastrophe modelled into the plan. Aside from the ‘big three’, NHV have managed to build an impressive business in one of the most fiercely competitive offshore markets but their client base is largely made up of smaller independents such as Premier, Ithaca and Enquest. They will no-doubt have one eye on the financial health of their customers. Babcock’s offshore business sits awkwardly in the wider corporate group and the remarks made earlier in the year by the senior management say a lot about their appetite for offshore oil and gas. Barring a miraculous turn-around for the oil industry, it seems almost inevitable that we will see further change in the rotorcraft competitive landscape. Expect more financial restructuring, the potential for some opportunistic M&A and in the most extreme circumstances the potential for government intervention. How exactly this plays out and what is left after the dust settles is yet to be seen.
Near Term - Focus on getting through 2020 intact
Forecasting is a hazardous game at the best of times. There is so much uncertainty around current coronavirus issues that forecasting future activity in oil and gas is near-impossible with so many potential scenarios that could play out. One of those scenarios is, without doubt, that we lose too much production capacity over the course of 2020 and by 2021 and beyond find that the oil industry needs to scramble to get some of it back to meet demand. Could that spark another investment cycle in offshore hydrocarbons? Of course. That’s probably the best-case scenario right now. But in the meantime, for the next six months, many of the offshore rotorcraft operators will be focused simply on survival.
Steve Robertson, Director
Air & Sea Analytics