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Era Group: A Flying Cigar Butt

One of the largest helicopter operators worldwide, Era has the bulk of its business concentrated in the Gulf of Mexico – arguably not the greatest place to fly nowadays, as offshore producers freeze their investment programs, and with these a good deal of airborne activity between the shore and the rigs.

Spun-off from Seacor Holdings – the investment vehicle of legendary entrepreneur Charles Fabrikant – the stock was introduced at $18 and quickly doubled in the following months. Two years later, it lingers at $8 amidst market’s disdain for anything related to oil.

Yet Era’s fleet of 133 aircrafts is competitive and well-diversified. Net book value of $22 a share offers a conservative proxy for reproduction value when, in a former presentation to shareholders, management mentioned a net asset value between $32 and $44 a share. Current share price may thus imply a considerable discount of about 75% (!) on net asset value.

Management has kept the business afloat despite difficult conditions. As such, though understandable, the maximum pessimism appears unwarranted, especially in light of the conservative accounting – maintenance costs are fully expensed instead of capitalized – and the reasonably safe balance sheet.

Small profits have been realized on aircraft sales, interest coverage remains decent, and there are no major and/or non-revocable financial obligations. No doubt the company has seen better days, but things could be worse.

A persistently low WTI price, client concentration – Anadarko weighs one third of revenue – and compromised asset liquidity in the second-hand market described by some as oversupplied stand out as chief investment risks.

Also, and of course, a helicopter crash would mean an immediate suspension of operations, as evidenced by CHC’s demise following an accident with one of its EC225 – an aircraft owned by Era as well.

Nevertheless, the company’s assets should get marked up at their reproduction value – at least – whenever the recovery happens, if it does someday. Opportunity thus appears asymmetric: a downside covered by tangible assets, for an upside that would be a multiple of the current share price.

Era’s stock is the kind of cigar butt patient investors should be happy to pick up as they sift through the current carnage in oil and gas.

(Was long ERA at an average price of $8 a share; sold at $14.)

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