One of the methodologies that I use to find investment ideas is to identify macro economic themes and or trends, which I think an industry and your sector would benefit from long term. The long term trend in energy prices is one such trend. A second step in the process is to find specific companies, which are attractively priced within the industry or sector that can potentially grow, and in this case Helix Energy Solutions.
While oil prices have fallen considerably, I believe that as the global economies recover that demand for oil will return as well and will push prices back up and possibly higher. The recovery will likely be slow in the United States, but the return to faster growth in Asia is likely to happen much sooner, if not now. Oil is a commodity which emerging economies need to grow and build their infrastructure and meet emerging consumers. So, I believe oil prices will trend higher over the long term.
One industry and company that is well positioned to benefit from higher oil prices is oil services and Helix Energy Solutions (symbol: HLX). Helix is an offshore drilling, exploration and drilling company. Located in Houston Texas, the company does business around that world.
Helix currently sells at $10.50, which gives it approximately $1.03 billion market capitalization considerably smaller than Schlumberger (Symbol: SLB) and Transocean (Symbol: RIG). For more than a decade, Helix posted very strong growth; however in 2006 it started to stumble. The company missed production targets. New equipment was delayed. The company took on significant debt with a goal of benefiting from the rising oil prices, and then oil prices tumbled.
It looked like Helix might go bankrupt if conditions got any worse. Investors panicked. The stock price fell to less than $3 share per share. However, Owen Kratz, the CEO, has sold some assets, implemented cost cutting programs and appears to have stabilized the balance sheet. It is still a very challenging business climate for offshore drilling, but higher oil prices will help spur demand for Helix’s services.
What makes Helix possibly more attractive than its larger competitors like Schlumberger and Transocean is its current valuation. Helix sells at less than book value at 0.77. Its price to sales ratio is also low at 0.45 and its forward price earnings ratio is 8.36. Of course, the valuation is low because it reflects the problems the company has had and the difficult operating environment. Yet, all this can turn around quickly with a jump in oil prices, which I think will eventually come.
More recently, Helix missed earnings estimates and revenue estimates. Second quarter earnings came in at $0.22 cents per share $0.04 cents less than what analysts had forecasted. Revenues came in at $494 million versus expectations of $519 million, which represented a year over decline of 6.7%... not exactly stellar results.
However, what gives me confidence that the long term outlook remains attractive is the company’s share buyback and insider purchases. In June the company announced a buyback and CEO bought 101,250 shares at $9.62-9.98 This was the CEO’s second purchase because in March he purchased CEO bought 144K shares at $3.58-3.63.
With a continued rise in the price of oil, I think the stock can easily trade above book value which means approximately 30% upside from current trading levels. I currently have a position in stock and will likely trade around my position.