Helix Energy Solutions: Buy Ahead Of Major Earnings Improvement Next Year

Henrik Alex profile picture
Henrik Alex
14.1K Followers

Summary

  • Initiating coverage of Helix Energy Solutions, a leading provider of specialty services to the offshore energy industry worldwide.
  • Discussing recent $120 million acquisition of the Alliance group of companies.
  • While Helix has done quite well for most of the industry downturn, a number of short-term headwinds will cause 2022 to be a transition year.
  • On the recent Q2 conference call, management projected very substantial improvement going into 2023 with the potential to more than double Adjusted EBITDA from anticipated 2022 levels.
  • The stock looks remarkably cheap trading at just 2.7x EV / Adjusted EBITDA based on expectations for next year. Assuming no major sell-off in oil prices, I would expect shares to double from current levels going into 2023. Get long Helix Energy Solutions to gain exposure to the anticipated multi-year recovery in offshore oil and gas services.

Drilling rig and support vessel on offshore area

Sergei Dubrovskii

Houston-based Helix Energy Solutions Group, Inc. (NYSE:HLX), or "Helix," is one of the world's leading offshore energy specialty services companies.

The company operates through three segments: Well Intervention, Robotics, and Production Facilities, with the well intervention business currently contributing approximately two thirds of revenues.

Helix recently acquired the Alliance group of companies ("Alliance") for $120 million in cash, a Louisiana-based provider of services in support of the upstream and midstream ‎industries in the Gulf of Mexico shelf, including offshore oil field decommissioning and ‎reclamation, project management, engineered solutions, intervention, maintenance, repair, heavy lift and commercial diving services.

The acquisition will contribute Adjusted EBITDA of up to $25 million and increase consolidated revenue by approximately 15% this year.

Helix has done quite well for most of the industry downturn as financial results were boosted by a number of high-margin legacy contracts. As a result, the company has not only managed to stay afloat but also reduced debt substantially in recent years:

Debt & Liquidity Profile

Company Presentation

Please note that the recently completed Alliance acquisition will reduce cash on hand by $120 million next quarter.

That said, management expects 2022 to be a transition year with several vessels undergoing regulatory inspections, a slow return for the North Sea market and a number of units performing short-term work at reduced rates with the company's two modern well intervention vessels in Brazil causing an estimated $35 million EBITDA hit alone.

As a result, the combined company's free cash flow will only be around break-even levels, down from $132 million recorded last year:

2022 Outlook

Company Presentation

But things are expected to change for the better going into the second half and next year as business conditions are improving across all segments as stated by management on the Q2 conference call:

Stronger utilization, increasing rates and in certain areas of the business, rates are improving better and quicker than we expected along with better terms and conditions. We are securing longer term contracts and looking to see more work with some of the Well Intervention assets into 2025.

(...)

Not only have the uncertainties of 2022 becoming clear, we also have perhaps the best visibility in recent years at this point for what may happen next year in 2023.

(...)

We've called 2022 a transition year for Helix. We fully intend to transition from a weak market in '22 to a high demand market in '23 and beyond.

In the Q2 presentation, Helix projected up to $127 million in EBITDA improvements in 2023 based on expectations for well intervention rates being up between 30% and 45% for the full year compared to rates at the beginning of 2022.

The company also forecasted higher utilization and rates for the Robotics segment next year.

Outlook

Company Presentation

Personally, I am expecting Adjusted EBITDA of at least $225 million in 2023, more than double the high end of the company's projection for this year.

At this level, Helix should return to substantial free cash flow generation next year.

With the company trading at just 2.7x EV / Adjusted 2023 EBITDA despite current expectations for a multi-year recovery in the offshore oil and gas markets, Helix looks remarkably cheap.

Bottom Line

While 2022 will be nothing to write home about for Helix Energy Solutions, the company projects substantial improvement going into next year with the potential to at least double Adjusted EBITDA from anticipated 2022 levels.

Even after the recent acquisition of Alliance, Helix continues to have a solid balance sheet with low net debt levels and decent liquidity which should improve substantially over the next couple of quarters.

With the company trading at just 2.7x projected EV / Adjusted 2023 EBITDA, Helix looks very cheap.

That said, with shares up by almost 40% from recent lows, investors should consider waiting for a setback before opening a position.

Get long Helix Energy Solutions to gain exposure to the anticipated multi-year recovery in offshore oil and gas services. Assuming no major sell-off in oil prices, I would expect shares to double from current levels going into next year.

This article was written by

Henrik Alex profile picture
14.1K Followers
I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.Despite not being a native speaker, I always try to deliver high quality research at no charge to followers and the entire Seeking Alpha community.

Disclosure: I/we have a beneficial long position in the shares of HLX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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