Description

Overview

At current prices, the Helix Energy converts represent a good risk-reward. At 80 cents*, the 4.25s yield ~17% for a <2yr maturity, whereas in the mid-70s*, the 4.125%s yield ~13.5% for a <3.5 year maturity. Using market prices to calculate a creation value through the converts, I thought this might be a Graham net-net but it doesn’t quite make it – maybe by the end of 2020 assuming no movement in convert prices.

*These converts are not super liquid so I’m using the higher end of the bid-ask spread here.

The oil services space is a disaster but Helix Energy benefits from being a well-capitalized offshore player. The company extends the life of subsea wells, reduces F&D costs and defers P&A liabilities. As an “opex” cost rather than a “capex”, well intervention is often the cheapest form of production for offshore E&Ps - economic at $9-$12/bbl. In past down cycles, wells intervention often recovers first.

During these uncertain times, the key is crossing the river (to quote Citrus – former VIC member). Helix will cross the river due to its cash balance, contracted assets and conservative management team. Unlike other oil & gas producers and service providers, Helix built cash, reduced debt and completed its capital program prior to the OPEC news and Covid-19.

Business

Helix is split into three segments: well intervention, robotics and production facilities.

Well intervention (73% revenues / 75% gross profit) provides rigless production enhancement and construction operations for shallow and deepwater fields in addition to decommissioning services (i.e. P&A). This includes troubleshooting to enhance production, recompletions and IMR (inspection, maintenance and repair) to prolong well life and reduce F&D costs. These services cover the lifecycle of a field. Intervention activity picks up as a result of producers not replacing reserves at the drill bit. Helix operates 7 vessels (5 owned / 2 leased) with various equipment and serves the Gulf of Mexico, Brazil, North Sea and West Africa. The Q5000 is under contract with BP until May 2021 and the Siem Helix 1 & 2 are under contract with Petrobras until April and December 2021.

Robotics (19% revenues / 11% gross profit) consists of remotely operated vehicles, trenchers and support/construction vessels and complements the well intervention operations while also offering exposure to the renewable space (36% of 2019 revenues). Renewable services includes burial for subsea power cable installations and seabed clearing services. The robotics assets include 44 ROVs, four trenchers and one ROVDrill along with chartered vessels to support deployment.

Production Facilities (8% revenues / 14% gross profit) include the Helix Producer 1 floating production (HP1 - capable of processing 45,000 bbls/d oil and 80 Mcf/d of natgas) unit under contract with Talos until mid-2023 (w/ drilling plans beyond), the Helix Fast Response System which provides emergency response to well control incidents (Macondo) under contract until March 2021 and the Droshky Prospect. Droshky is a good example of creative contracting as it involved the company’s acquisition of old GOM blocks from Marathon Oil where any production revenues belongs to Helix and they are compensated for P&A work done at their discretion. This allows Helix to fill in gaps between contracts as the required works adds 40-60 days of utilization to a well intervention unit. 

https://helixenergysolutionsgroupinc.gcs-web.com/static-files/fae65b72-d5c9-4c7e-b84e-af0ebdea4ba2

Capital Structure

The capital structure is straightforward. There is a $32 million term loan, $80 million project debt (non-recourse), $60 million MARAD debt (50% guaranty) and two $125 million converts (4.25s due May 2022 and 4.125s due September 2023). Total debt of $423 million compares to cash of $212 million (+ $16 million expected CARES Act tax refunds). The market cap is $387 million.

It’s this cash balance plus expected cash generation in 2020 and 2021 that makes Helix unique. Additionally, the converts represent nearly 60% of total debt outstanding which provides potential exchange/extension options down the road in dire scenarios. The presentations on the company’s website shows the historical progression of debt reduction. Notwithstanding the difficult backdrop, management targets zero net debt.

All the secured debt amortizes. The remaining 2020 payments are $33 million. The term loan matures at YE 2021 and the project debt in January 2021. The project debt of $80 million is secured by the Q5000 which I believe will get extended if the company announces an extension to the BP contract. Other maturing debt will either be refinanced or repaid using cash reserves.

Financials

There is no denying that this business is cyclical. From 2014 to 2019, revenue was $1,107, $696, $488, $581, $740 and $752 million as the business was hit post 2014 and started to recover until this recent episode. Similarly, EBITDA was $378, $173, $90, $107, $162 and $178 million over that time period. The EBITDA for 2018 and 2019 is actually $20 million higher in my opinion because I exclude mobilization costs that were already incurred but are amortized over the life of the Petrobras contracts.

Historical capital expenditures were elevated due to new vessel construction. The completion of the Q7000 (November 2019) ends all new build capital spending. Going forward, maintenance capital spending is $30 to $50 million annually. Spending in 2020 will be at the lower end and 2021 will be $15-$20 million.

Prior to guidance being pulled, the company expected revenues of $820 to $890 million, EBITDA of $180 to $210 million (again without the $20 million mob addback) and free cash flow of $110 to $150 million.

Where Should Earnings Shake Out?

Unfortunately, projecting out revenue and EBITDA is difficult in this environment. Contracts with BP and Petrobras will help insulate 2020 and parts of 2021. The company has never been EBITDA negative. There is a reason for this niche business to exist. Producers will invariably defer work and seek to renegotiate rates. However, Helix provides well intervention at 20%-40% cheaper than offshore rigs and if a company is cutting back at the drill bit and not engaging in M&A, production enhancement is the only alternative to add reserves. If wells become non-commercial, they become candidates for P&A which benefits Helix. FWIW, management is confident the aforementioned BP and Petrobras contracts will be extended albeit at lower day rates.

The previous cycle (post 2014) saw EBITDA drop to as low as $90 million in 2016. The 2016 figures captured spot market weakness but this was prior to the Siem Helix 1/2 vessels contract with Petrobras and the BP contract only started May 2016. It was also before the completion of the Q7000 but that could turn out to a negative, at least temporarily due to warm stacking costs.

From a demand perspective, the current environment is obviously worse than in 2016, but supply is in better shape. Unlike the prior period, offshore E&Ps have worked off their backlog of long term deepwater rig contracts. Vessels have been cold stacked, drillers cannot afford to cut rates (but perhaps they’ll continue to do so) and there is not the same sort of stranded supply of vessels that E&Ps can use for well intervention. At the fireside chat in April, the company noted that contracted work is continuing but the spot market is weak and work is being pushed from 4Q 2020 to 2021. Rate reduction requests are expected.

In recent years, the robotics segment went from negative to positive EBITDA. This is a function of market improvement and the expiration of an above-market charter and underwater fx hedge. The renewable piece of this segment mitigates some of the decline. For example, the company called out a renewable trenching project in the US this year and an improving backlog in Europe for 2022-2023.

So where does this leave us? I am using $100 million for 2020 and $75 million for 2021. Frankly, I think the margin of safety here is so big that if I’m off and EBITDA dips to $50 million in 2021 it won’t matter. For capex, I’m assuming $35 million and $20 million, respectively. Interest and taxes (foreign) are in the $20 million area.

Valuation

Let’s start with creation value assuming all secured debt at 100 cents, although the $80 million Q5000 loan is non-recourse debt. Total secured debt plus the $250 million of converts in the ~80 and mid-70s results in a creation value of near $370 million. This means the converts are valued around the cost of one new build well intervention vessel before counting cash and all other assets. Also, the book value of PP&E is $1.8 BN. This is for illustration. I am fully aware that valuation versus new build cost or PP&E is faulty.

Current cash is $212 million + $16 million for CARES Act recoveries (in 2020-2021). Furthermore, the 1Q cash balance should represent the low point of the cash cycle since it’s a seasonally slow period, capex and drydockings were front-end loaded and working capital sucked up some additional cash. Using my estimates, I calculate that Helix will generate at least $70 million of FCF in the remainder of 2020 (before debt repayment). This takes cash of $212 million to near $300 million if I capture the tax recoveries. Therefore, creation value approximates $160 million currently or $70 million using the year end cash balance or 2x and 1x my 2021 trough EBITDA estimates. This compares to historical trading levels of 7x. As a bonus you get NOLs of $228 million.

Lastly, the HP1 floating production vessel generates $25 million of EBITDA annually pursuant to a contract with Talos. This vessel is attached to the Phoenix Field. Talos is levered and bonds are trading at distressed levels but the company has a good hedge book and low breakevens. There is roughly 2yrs before the maturity of its 2nd lien bonds. This should have value of at least $40 million and likely more.

Conclusion

I am happy to answer questions on Helix. If interested in Helix, I would urge you to reach out to Owen Kratz or Brent Arriaga . Owen will talk to you and he’s a straight shooter.  He doesn’t sugarcoat anything. 

Catalyst

Cash generation 

Bond buybacks 

Contract extensions