Description

Long Helix Energy Solutions (HLX).

Upside of over 60% to $12 in the next 12 months, based upon 7 x EBITDA.

Stock has approximate $10 / share book value.

Helix Energy Solution (HLX) is a Houston based international offshore / marine energy services company, focused on specialty services within that space, which includes well intervention, robotics, decommissioning operations including deepwater work, and more recently in their history, energy transition / renewable energy markets. HLX has established itself as a meaningful player in energy transition, which is certainly au courant (term not used pejoritavely), and is poised for growth. HLX's business geograpy includes the Gulf of Mexico, U.S. East Coast, Brazil, North Sea, Asia Pacific, and West Africa regions. HLX, formerly known as Cal Dive International, has its roots in underwater construction and repair work for offshore drilling units. Emphasis in our view should be towards robotics, energy transition, and well intervention.

More specifically, HLX is an offshore pure play levered to production and life-of-field services, operating a world class fleet of built-for-purpose well intervention vessels levered to a broad global offshore recovery. We believe HLX exercises capital discipline, and continues deleveraging their balance sheet. Besides energy transition / renewables, HLX expanded its offshore life-of-field services model from oil and gas production, to include decommissioning. The highly accretive Helix Alliance extends the company’s service offering to include full field decommissioning, targeting a $7 billion opportunity over the next 10 years. Helix’s Robotics division has also been positioned for the growing offshore wind farm market where a global race to add capacity should be another multi-decade opportuniaty in energy transition / renewables.

HLX services are centered on a three-legged business model which include maximizing production of remaining oil and gas reserves, supporting renewable energy developments (offshore wind), and decommissioning end-of-life oil and gas fields. In the area of production maximization, HLX works to achieve this through production enhancement and problem remediation through subsea intervention, provisioning of lower cost production zones in mature situations, and collaborative plans to find the most efficiency and economic value in end of life reserve situations. 

Those three components of HLX business model are :

Maximizing Remaining Reserves in Existing Reservoirs
- Production enhancement and problem remediation via subsea well intervention
- Provision of a low-cost production unit for mature reservoir production
- Equity assumption of end-of-life reserves with management and maximization until abandonment

Well and Field Abandonment / Decommisioning
- Plug and abandonment of subsea and dry tree wells upon depletion of production
- Abandonment of subsea architecture
- Abandonment and removal of shallow water production Facilities

Offshore Wind Development Support 
- Trenching and burial of power cables
- UXO and boulder clearance site preparation

In contrast to many offshore service companies, HLX has been more resiliant during industry downturns, with cash flows boosted by a number of high-margin legacy contracts. This has allowed HLX to reduce debt substantially in recent years.

HLX stated on their last 2022 quarterly call, that they expect meaningful free cash flow generation for the foreseeable future.

On 2/20/23, HLX reported another strong adjusted EBITDA number, which beat street estimates on better-than-expected revenues across all segments. Well Intervention operating margins improved approximately 245 bps. Higher revenues in 2023, and HLX guiding for EBITDA to nearly double this year to between $210mm - $250mm; see just below.

Management's 2023 guidance, is revenue expected in the $1.0-1.2B range, which represents a ~27% Y-Y increase at the midpoint. Well intervention revenue of $640-690M is expected to comprise 55-65% of the total, with management indicating good visibility for the back half of the year when some vessels roll off contract. Management expects adjusted EBITDA to be in the $210-250M range, which is ~4% above consensus at the midpoint. CAPEX is also higher Y-Y at $50-70M, and we note much of that looks to be front loaded as five well intervention vessels undergo drydocking or inspection in 1H23. HLX’s guidance points to an EPS range of $0.20-$0.50 for 2023.

HLX closed Q4 with liquidity of ~$285M (~$187M in cash, ~$98M available under revolver). Combined with expected FCF of ~$140-160M in each of the next two years and a low debt position of ~$470M (including leases, which I did not use in the EV calculation), and we anticipate management to continue balancing debt paydowns and opportunistic growth.

As a part of the Energy Transition component, HLX Robotics segment is benefitting from an increase in renewables demand, with wind farm site clearance driving renewables mix of total revenue to 10%. This represents ~45% of 2022 Robotics revenue, which is up from 36% in 2019 and 41% in 2020.

We like the balance of HLX's more traditional, but still unique (robotics), legacy business, coupled with a growing business in energy transition / renewables, which should have a multi-year tailwind.

Our expactaions are that HLX will generate free cash flow of approximately $120mm+ in 2023, and nearly $200mm in 2024.

Further, HLX has a new $200mm share repurchase authorization (approx. 15% of outstanding shares), along with HLX's plan to return 25% of FCF. 

We are looking for a (12 month) price target of approximately $12 share, based on a multiple of 7 x 2024 EBITDA estimates, which appears reasonable based upon historic trading multiples of a 6.6 x EBITDA average over the last 10 years. This slight premium, and perhaps upside to more, should be warranted as the energy transition / renewables business grows.

Risks :

Our downside scenario is that 2019 proves to be peak oil demand, with investments in onshore renewable energy taking precedence over offshore oil projects.

Catalyst

Continued execution, particularly in area of energy transition / renewables.