-- U.S. aviation service provider PHI Inc.'s operating performance has improved materially over the last several quarters due to increased Gulf of Mexico activity and increased profitability in the company's Air Medical segment.
-- We are revising the outlook on the company to stable from negative. We are affirming the 'B+' corporate credit rating.
-- The stable outlook reflects our view that PHI's near-term credit metrics will continue to improve while maintaining adequate liquidity.
On April 27, 2012, Standard & Poor's Ratings Services revised its outlook on Lafayette, La.-based PHI Inc. (PHI) to stable from negative and affirmed its 'B+' corporate credit rating on the company.
We revised our outlook on PHI to stable to reflect the company's improved prospects stemming from increased activity in the Gulf of Mexico and healthier margins in the company's Air Medical segment. These factors have resulted in stronger credit protection measures and liquidity. We currently expect PHI's leverage to improve to the mid-4x area by the end of 2012.
The ratings on PHI Inc. reflect our assessment of the company's "weak" business risk and "aggressive" financial risk. The ratings also incorporate the company's participation in the highly cyclical and volatile oil and gas industry, exposure to weather and seasonal fluctuations that may limit flight hours, and a levered capital structure. Offsetting these negatives, the ratings also reflect PHI's good market share in the Gulf of Mexico, the industry's oligopolistic structure, and the improvement in deepwater permitting in the Gulf of Mexico, which is having a positive effect on oil and gas flight hours.
Standard & Poor's views PHI's business profile as weak. Its oil and gas segment is one of the largest operators in the U.S. Gulf of Mexico oil and natural gas helicopter services industry and is subject to the inherent cyclicality in the offshore exploration and production (E&P) industry. Flight hours correlate with changes in the offshore rig count and in offshore oil and gas production. The company has increased its focus on the deepwater Gulf of Mexico in the past few years, and we expect approximately 70% of PHI's oil & gas flight hours to come from the deepwater Gulf of Mexico. PHI derived approximately 66% of its annual revenue and 68% of operating income from customers in the oil and gas industry in 2011.
PHI holds approximately 40% regional market share in the Gulf of Mexico, controlling together with its three largest competitors, about 90% of total helicopter capacity. This oligopolistic industry structure and PHI's significant market share result in a more stable customer base, which helps limit volatility, compared with other oilfield service providers. We consider the company's contract structure with oil and gas customers as generally favorable for credit quality. Multiyear contracts that include fixed monthly fees for dedicating specific aircraft to customers provide revenue stability. PHI estimates the fix-fee component to be about 50% of its contract revenue. These contracts also include a variable fee based on flight hours.
We expect PHI's profitability to improve meaningfully in 2012 given increased demand and a shift toward higher margin revenue sources. The company has seen an increase in its oil and gas flight activity in the fourth quarter of 2011 with associated flight hours posting a 6.1% sequential increase to 27,395 hours. This improvement is due to an increased pace of permitting activity in the Deepwater Gulf of Mexico. In addition, the company is realizing greater revenue contributions from its medium and heavy aircraft, which typically garner higher margins. PHI has also seen an improvement in the profitability of the Air Medical segment as a result of increased pricing and the company's ability to cut costs.
We view PHI's financial risk as aggressive, reflecting its strong liquidity, high debt leverage and our estimate that the company will fund capital spending and working capital investment through internal cash generation and cash on hand in 2012. Assuming current year revenue growth of 17% and gross margins of about 21%, we project that PHI will generate approximately $110 million of adjusted EBITDA in 2012. Cash from operations of about $100 million and cash and investments of $105 million at year-end 2011 should cover capital spending of about $150 million in the current year. As a result, we expect leverage to be approximately 4.5x for full-year 2012 and 2013.
We view PHI's liquidity as "strong". Key factors in our assessment include:
-- Cash and short-term investments of $105 million and $29 million of revolver availability as of Dec. 31, 2011. We forecast that the company will remain in compliance with the covenants of its revolving credit facility over the intermediate term.
-- We estimate that forecast capital spending of approximately $150 will likely exceed cash from operations by roughly $50 million. We note that the company could curtail capital spending to as low as $20 million in the event of a downturn.
The issue-level rating on PHI's senior unsecured debt is 'B+' (the same as the corporate credit rating on the company), and the recovery ratings is '4', indicating our expectation that lenders will receive an average (30% to 50%) recovery in the event of a payment default. For the complete recovery analysis, please see Standard & Poor's recovery report on PHI Inc., published Oct. 5, 2011, on RatingsDirect.
The outlook is stable. The company is benefiting from the increased activity in the deepwater Gulf of Mexico. In addition, PHI's Air Medical segment is seeing improved profitability. We expect year-end 2012 leverage to be approximately 4.5x. A negative rating action could occur if we believe that PHI will maintain leverage above 4.75x. Conversely, should debt leverage improve to less than 3.75x on a sustained basis, we would consider a positive rating action.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Corporate Ratings Criteria 2008, published April 15, 2008.
Ratings Affirmed; Outlook Revised To Stable
Corporate Credit Rating B+/Stable/-- B+/Negative/--
Senior Unsecured B+
Recovery Rating 4
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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