Despite The North Sea Slowdown, Helix Energy Solutions Is Steady
Summary
- HLX's well intervention asset utilization has improved significantly and is likely to stay strong.
- The company's Q4000 and Q5000 (well intervention vessels) have contracted work in Q4 2021, extending into the next year.
- However, the company's well intervention vessels in the North Sea have been stacked due to project slowdown.
- A robust balance sheet and a relatively safe debt-to-equity ratio will keep investors interested in the stock.
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HLX Is Gearing Up
In the near to medium term, Helix Energy Solutions Group (NYSE:HLX) is likely to see a surge in abandonment work and riser-based well intervention scope of work in the US Gulf of Mexico. In West Africa, it will operate its well intervention vessel into late Q4 and in 2022. Also, a general improvement in rig rates in the coming quarters following the energy industry recovery has caused asset utilization to improve sharply. The company will broaden its scope in renewable energy in the medium to long term, including site clearance and survey projects.
On the other hand, the North Sea Well Intervention business was adversely affected by reduced work opportunities following COVID-19. In 2021 so far, the company has more than doubled its cash flows. This, plus a comfortable leverage level, leaves its balance sheet with sufficient strength. The stock is quite reasonably valued versus its peers. Therefore, I think it can move sideways in the short term. I suggest investors hold it with an expectation of an upside in the future.
The Market Outlook, Utilization, And Strategy
After a cautious capex spending for the majority of 2021, the macro background has now relatively improved, thus making way to a renewed activity in the Gulf of Mexico (or GoM) and the North Sea well intervention market. In the GoM, HLX's Q4000 and Q5000 (well intervention vessels) have contracted work in Q4 2021 extending into Q1 2022. The Q5000 saw utilization increase to 77% in Q3 compared to 72% in Q2, while the Q4000 had utilization rise to 71% compared to 45% in Q2. However, the North Sea Well Intervention business opportunities are limited as both the vessels working in that region have been stacked. In West Africa, the company expects to operate the Q7000 into late Q4 with possibilities to go beyond that.
In The Robotics segment, the project in the North Sea will slow down in the winter. There are, however, substantial utilization upsides for the Grand Canyon II vessel in APAC for the rest of 2021, while Grand Canyon III's utilization can go up because of more robust trenching operations in the North Sea. The other impact follows the ESG-related movement, which has caused the government to focus more on field abandonment and removal. The company plans to expand its current riserless capability and introduce the first non-rig riser-based asset in the North Sea.
It is worthwhile to understand why the company's management is repositioning itself as the industry outlook changes. Compared to many other regions, the impact of COVID-19 was more severe in the North Sea. So, it will continue to recover for some time. Therefore, HLX can see a pick-up in production enhancement work in that region. Also, long-term contracts have given way to spot market rates, adversely affecting GoM operating results, especially after the BP contract ended in 2021.
Nonetheless, higher demand can increase its GoM asset utilization in 2022. Although rig rates remain low, rig availability or supply stays low, which can correct the rates upward in 2022. In 2023, the rates are expected to increase even further.
Short-term Forecast
In FY2021, HLX's management expects revenues to decrease by 15% (at the guidance mid-point) compared to FY2020. EBITDA in FY2021 can drop by 33% (at the guidance mid-point). However, compared to previous guidance, it increased the lower range of the forecast due to increased utilization in Q4. It also revised up the cash flow guidance. Now, it expects the FCF to increase by 28% in FY2021 as cash flow from operations strengthens following a mild increase in EBITDA. The forecast assumes an annual capital spending forecast in the range of $15 million - $25 million.
Alliance With SLB And Renewable Energy Initiatives
In September 2021, the HLX and Schlumberger alliance received a three-year award for riser-based well intervention scope of work for Helix Q5000 and the 15K Intervention Riser System in the US GoM. The alliance facilitates a single point contact mechanism allowing for easier contracting for clients. Although the contracts are not a guarantee, HLX has, on many occasions, received contracts for riser-based inventions for BP in the Gulf of Mexico. It expects to have utilization for one to three wells each year in this region. To know more about its strategies, read my previous article here.
HLX has initiated programs to reduce its carbon footprint and greenhouse gas emissions in renewable energy projects. It has received contracts to undertake site clearance and survey projects. Recently, it bagged renewable trenching work that may require a second trenching investment in 2022.
Analyzing The Q3 drivers
In Q3, HLX's revenues from the Well Intervention segment remained nearly unchanged compared to Q2 2021, although the segment operating loss steepened further during this period. Despite a remarkable improvement in Q5000 and Q4000 vessel utilization, its North Sea Well Intervention business was adversely affected by reduced work opportunities following COVID-19. Q5000 engages with three clients, while Q4000 has contracts with two clients for production enhancement operations in ultra-deepwater. Q4000 will also perform small construction projects.
On the other hand, the Robotics segment witnessed a 35% sequential revenue rise in Q3, resulting in operating income turning several times higher quarter-over-quarter. The segment benefited from the comfortable weather season in the North Sea, which resulted in increased trenching activity and site clearance work. Revenues from the Production Facilities segment increased by 10% in Q3 versus Q2 due to increased enhancement work at the Droshky field.
Cash Flows And Debt
HLX's cash flow from operations (or CFO) more than doubled in 9M 2021 compared to the previous year. Despite lower revenues in the past year, decreases in working capital requirements led to the CFO's rise. Year-over-year, capex also decreased in 9M 2O21, resulting in free cash flows increasing by 189% in this period.
Since HLX's liquidity (cash plus revolving credit facility) is strong ($307 million), it faces insignificant repayment risk in the near term. Its debt-to-equity ratio (0.18x) is lower than many of its peers. During Q3, it restructured debt after entering into an $80 million asset-based revolving credit facility and paying off a term loan. The majority of its debt repayment lies in 2026 ($193 million). I think the company's balance sheet is robust for the medium term.
Linear Regression Based Revenue Forecast
Based on a regression equation between various industry indicators and HLX's reported revenues for the past six years and the past four quarters, I expect its revenues to increase in the next 12-months (or NTM) and decelerate in NTM 2023 and NTM 2024.
The regression model suggests that its EBITDA will keep growing in the next two years using the average forecast revenues.
Relative Valuation And Target Price
HLX's forward EV-to-EBITDA multiple expansion versus the adjusted trailing 12-month EV/EBITDA is sharply higher than its peers, which should typically result in a much lower EV/EBITDA multiple compared to peers. The company's EV/EBITDA multiple (6.4x) is lower than its peers' (OII, DRQ, and OIS) average (8.0x). So, the stock is reasonably valued at this level.
According to the sell-side analysts' estimates, the target price is $5.4, which, at the current price, yields ~63% upside. I think the stock has a limited strength to move up, and therefore, Wall Street is likely to be overestimating the returns potential.
What's The Take On HLX?
At this juncture, various forces are at play for Helix. While there is a retribution for the abandonment work previously shrinking in the GoM and a general improvement in the energy market environment, the shadow of COVID refuses to go away completely, thus causing stumbling blocks to growth. In Q3, utilization improved sharply versus a quarter ago and is likely to remain strong in Q4, going into 2022. Despite that, the general oversupply in the oilfield service sector and project slowdown in the North Sea can send the topline lower in the short term. So, the stock price hugely underperformed the VanEck Vectors Oil Services ETF (OIH) in the past year.
HLX's alliance with Schlumberger for riser-based well intervention scope of work will be a crucial driving factor in the medium-to-long term. Plus, the company's foray into the renewable energy side includes site clearance and survey projects, which may involve a second trenching investment in 2022. Currently, I do not see much upside, but a resilient energy environment can hold an upside in the medium term.
This article was written by
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My comments on this situation can be found here:seekingalpha.com/...Long $HLX
