Nearly two years ago the U.S. returned as a petroleum powerhouse, a role not seen since the 1970s. The U.S. was pumping so much oil that it became less dependent on foreign supplies and was projected to be the leading world producer in a decade. The reason: Technology made affordable by higher prices.
Higher commodity prices attracted investors and companies to use leverage. Higher energy prices did not last, and anyone or company levered too high now has a problem. Standard & Poor’s recently found that nearly half of the 155 energy companies they reviewed are rated B- or less, meaning they are at a high risk of default. Outside of this study, there were 42 energy companies that already filed for bankruptcy last year.
Smaller energy companies are particularly vulnerable when oil prices decline dramatically. Energy related companies performed miserably since crude prices fell precipitously. “Failing grade” gives a breakdown of energy stock performance within the Russell MicroCap Index. The average decline does not surprise us; the 12 companies that did well are the outliers. A few of those winners were hedged and others were transportation companies, that generally did well. The other common theme was that many of the companies are levered.
Leverage increases the chance of default, but leverage is only bad if there are no strong assets to support that debt. We found a few companies within this wreckage that could be worthwhile investments.
Petroleum Helicopters (PHII) provides transportation services within the offshore oil and gas industry and air medical services for hospitals and emergency services. This company’s stock declined nearly 50% last year, and the company does have a levered balance sheet. However, PHII has assets to support that debt. It owns nearly 275 aircraft, with nearly 60% used for the oil and gas industry. While a majority of the firm’s business is expected to be weak due to its offshore oil and gas services, nearly 40% of their business is stable.
PHII is a strong company with decent fundamentals, but there are a couple of major elements that should interest investors. The company’s stock now trades at 80% of book value compared to the enterprise value. While PHII does have nearly $580 million in debt, and the interest expense yearly is near $30 million, its assets include $300 million cash and close to $1 billion worth of equipment and receivables. These factors should be enough to attractive investors, but there is more.
The company’s CEO, Al Gonsoulin, has purchased more than $4 million worth of stock in the past year- and-a-half. There also have been a couple of other insider purchases, too. The part that intrigues us the most is that there are two share classes; one is non-voting, PHIIK, and the other, PHII, is the voting class (see “PHII(K), a tale of two stocks”). Gonsoulin purchased the majority of the voting stock from past management in the low $20s in 2001. The business is now three times larger than it was 15 years ago, and more diversified, yet the stock trades at less than that level in 2001. Gonsoulin already had control of the company, so why would he purchase an additional $4 million worth of stock? We never like to speculate on investments; draw your own conclusions.
Perritt Capital Management owns 313,000 shares of Petroleum Helicopters (PHIIK)