Helix Energy Solutions: Poor Sentiment But Decent Prospects Going Into 2025, Buy

seekingalpha10-25

Helix Energy Solutions Group reported mixed Q3 results, with revenues being impacted by adverse weather conditions in the U.S. Gulf of Mexico and elevated mobilization activity.However, profitability ...

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Michael Saint Maur Sheil/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 Thursday's session, leading offshore energy specialty services provider Helix Energy Solutions Group, Inc. (\"Helix\" or \"Helix Energy\") reported mixed third quarter results. While revenues came in below consensus expectations, earnings per share were above estimates:   Yahoo Finance / Company Press Release Segment performance was also mixed, with the core well intervention business being impacted by key assets Q4000 and Q7000 transitioning to new drilling locations. While the company received mobilization fees, accounting rules require revenues to be recognized over the term of the respective contracts.   Company Press Release In addition, both the Helix Alliance shallow water abandonment operations and the company's production facilities were impacted by adverse weather conditions in the U.S. Gulf of Mexico. Despite these headwinds, profitability and Adjusted EBITDA margin remained solid:   Company Press Releases / Regulatory Filings Helix generated $53 million of free cash flow and ended the quarter with $324 million in cash and cash equivalents, as well as $315 million in debt. Total liquidity amounted to $399 million:   Company Presentation The company also tweaked full-year expectations, with guidance for the shallow water abandonment segment being reduced for the third time in a row this year:   Company Presentation Please note that slightly lower revenue expectations for robotics, shallow water abandonment and production facilities are likely to be more than offset by persistent outperformance of the company's core well intervention segment. However, the mid-point of the projected Adjusted EBITDA range has been lowered by $5 million:   Company Presentation On the flip side, free cash flow expectations have been raised further due to a combination of favorable working capital movements and planned capital expenditures moving into next year. While Helix abstained from share repurchases during Q3, the company still expects to spend between $20 million and $30 million on buybacks this year thus leaving between $10 million and $20 million for the current quarter. On the conference call, management reiterated expectations for substantial Adjusted EBITDA growth next year and also commented on the recent weakness in the offshore drilling market:  (...) there's been a significant messaging of a softer market for 2025 for upstream service providers. Helix has intentionally developed our business line to focus on the downstream segments of oil and gas, which are largely driven by OpEx rather than CapEx spending. As a result, we believe that the Helix model is more resilient in a softer market than most CapEx-dependent business models. Helix is also well positioned by having 4 of our 7 major assets already committed on 2- to 3-year contracts. Our Robotics business is primarily focused on the offshore wind market, which we feel is well positioned to continue to get stronger for us. A softer oil and gas market may actually not be a bad thing for us as we anticipate even stronger free cash flow generation for Helix with good visibility. The price point for capital allocation for growth may become better and more rational for full cycle consideration.  Absent any major working capital fluctuations or asset acquisitions, free cash flow should exceed $200 million next year thus providing ample room for additional share buybacks. That said, the recent weakness in oil prices and disappointing contracting activity in the offshore drilling markets have impacted the company's stock in recent months:   Yahoo Finance Since my last update on Helix three months ago, shares have retreated by almost 30% without major changes to the company's strong near-term outlook. On Thursday, BTIG analyst Gregory Lewis downgraded the company's shares on concerns for increasing drillship competition in the well intervention market due to a lack of near-term demand for offshore exploration and field development work. In addition, Lewis considers the anticipated unwinding of OPEC+ production cuts in combination with persistent oil price volatility to be a headwind for the company's shallow water abandonment operations. While these are valid concerns, Helix has already secured long-term, high-margin contracts for the majority of its key well intervention assets. As a result, any impact from the above-discussed headwinds should be limited. That said, out of an abundance of caution I have lowered my Adjusted EBITDA expectations for both 2025 and 2026 by less than 10%:   Author's Estimates As a result, I am reducing my price target from $16.00 to $15.00 while reiterating my \"Buy\" rating on the stock. Based on Thursday's closing price, the shares offer more than 60% upside from current levels.   Author's Estimates Please note that leading offshore drillers like Borr Drilling (BORR), Noble Corporation (NE), Valaris (VAL), Seadrill (SDRL) and Transcoean (RIG) and support vessel providers like Tidewater (TDW) and SEACOR Marine Holdings (SMHI) have yet to report third quarter results. While I have already reduced my estimates and price targets for offshore drillers in recent weeks, I have decided to wait for commentary from Tidewater and SEACOR Marine Holdings before taking action. However, it will likely require a change in sentiment for offshore oil service companies to leave the penalty box. Given this issue, Helix Energy's stock might be dead money in the near term. Key Risk Factor Please note that offshore oil services stocks remain heavily correlated to oil prices, so any further down move in the commodity would almost certainly result in the company's shares moving to new 52-week lows. Bottom Line Helix Energy Solutions Group reported mixed third quarter results as revenues were impacted by elevated mobilization activity and adverse weather conditions. However, profitability and cash flow generation remained strong, and Helix Energy continues to expect substantial improvement next year as several of the company's assets transition to higher-margin contracts. While the offshore drilling market has been suffering from weak contracting activity in recent quarters, Helix should see very little near-term impact. Nevertheless, I have lowered my estimates slightly to account for increased uncertainty. Consequently, I am reducing my price target from $16.00 to $15.00 but reiterate my \"Buy\" rating on the shares.  That said, it will likely require a change in sentiment for the stock to leave the penalty box.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"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":"4.29.2","shortVersion":"4.29.2","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/2478362333"}