Helix Energy Solutions: Strong Prospects Going Into 2025, Buy

seekingalpha04-26

Helix Energy Solutions reported mixed Q1 2024 results, with weaker-than-expected profitability offset by very strong cash generation.Q2 will be impacted by an $85 million earnout payment related to ...

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Abstract Aerial Art/DigitalVision via Getty Images Note: I have covered Helix Energy Solutions Group, Inc. (NYSE:HLX) previously, so investors should view this as an update to my earlier coverage of the company. After the close of Wednesday's session, leading offshore energy specialty services provider Helix Energy Solutions Group, Inc., or \"Helix,\" reported mixed first quarter 2024 results with profitability falling well short of consensus expectations:   Company Press Release / Yahoo Finance However, the majority of the shortfall was attributable to a $21 million pre-tax loss related to the retirement of the company's remaining 2026 convertible notes.   Company Press Release / Regulatory Filings More importantly, cash generation was very strong. As a result, the company ended the quarter in a net cash position for the first time since acquiring the Helix Alliance shallow water abandonment operations in 2022:   Company Presentation That said, Q2 will be impacted by an $85 million earn out payment to the former owners of the Helix Alliance business after the shallow water abandonment segment vastly outperformed expectations in recent quarters.   Company Presentation Unfortunately, decommissioning activity in the U.S. Gulf of Mexico has slowed down as of late. As a result, management has slightly reduced its 2024 expectations for the segment while at the same time increasing guidance for the well intervention business:   Company Presentation At the mid-point of the lowered range, the shallow water abandonment segment would experience a 21% year-over-year decline. However, the company reiterated its overall 2024 guidance for revenue, Adjusted EBITDA, free cash flow and capital additions:   Company Presentation Please note that free cash flow will be impacted by the above-discussed Helix Alliance earn out payment, with $58 million considered a cash outflow from operations and only the remaining $27 million being allocated to financing activities. On the conference call, management was particularly optimistic about the prospects for the well intervention segment and pointed to a significant increase in profitability expected for 2025 and beyond as vessels transition from low-margin legacy contracts to prevailing market rates (emphasis added by author):  (...) We're seeing meaningful demand in West Africa, have only worked in Nigeria, there are significant market expansion opportunities as well for us including in Angola and other countries. We are experiencing year-over-year increasing demand from '24 to '25 for the deepwater intervention in the U.S. Gulf of Mexico. We'll also be looking for improving rates. The Brazilian market for Well Intervention is also very active with demand increasing not only from Petrobras, but from other operators. The Q7000 is scheduled to be relocating from Australia to Brazil for Shell and we're in discussions with Petrobras for a multiyear contract on the SH2. All new rates would be at meaningful increases with further potential increases, driven by our efficiencies and a continuation of a tight rig market. Australia and APAC is also another market where we're seeing increasing demand. All to say that, markets are strong globally and we don't anticipate having enough supply with our current fleet to meet all the demand.  While the company expects to generate strong cash flows for the next several years, management stated its preference for pursuing profitable growth rather than aggressively returning excess cash to shareholders. Consequently, utilization of the company's existing $200 million buyback program is likely to remain muted with approximately $20-$30 million in repurchases targeted for this year. Valuation-wise, Helix is currently trading at slightly above 4x EV/Adjusted EBITDA based on my expectations for next year:   Author's Estimates Assigning a rather conservative multiple of 5x my 2025 EV/Adjusted EBITDA estimate would yield a $13.50 price target for the shares thus providing for approximately 20% upside from current levels:   Author's Estimates However, assigning an EV/Adjusted EBITDA multiple more in line with the offshore drilling industry or using my estimates for 2026 would increase the price target to $16. Consequently, I am reiterating my \"Buy\" rating on the stock. That said, speculative investors looking for offshore oil exposure with higher risk/reward characteristics might want to consider an investment in offshore drillers like Diamond Offshore Drilling (DO) and Valaris (VAL) as well as offshore support vessel provider SEACOR Marine Holdings (SMHI).   Author's Estimates Key Risk Factor Please note that offshore oil services stocks remain heavily correlated to oil prices, so any sustained down move in the commodity would almost certainly result in Helix Energy Solutions' shares taking a hit. Bottom Line Adjusted for one-time charges, Helix Energy Solutions reported Q1/2024 results largely in line with expectations and reiterated its full-year outlook. The company generated more than $60 million in free cash flow and finished the quarter in a net cash position for the first time since the acquisition of the Helix Alliance shallow water abandonment operations two years ago. Please note that Q2 cash flows will be impacted by an $85 million earn out payment related to this acquisition.  With substantial improvements in profitability and cash generation expected in 2025 and beyond, I am reiterating my \"Buy\" rating on the shares with an unchanged price target of $13.50.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430260706"}