Description

Helix Energy Solutions (Helix)

 Helix is a offshore oil service provider that I believe will survive the current offshore oil industry depression due to the strength of its balance sheet and the fact that it is cash flow positive (before growth capx) at what is likely the bottom of the cycle.  However, the business recovery, while I think inevitable, is likely a long process, so patience will be required.   Helix was written up on VIC once before in 2013 by Sancho. 

Not too long ago, before the oil crash, Helix looked like it would be generating EBITDA of $550 million today.  Helix is projecting to generate $115 million in EBITDA in 2017 (at midpoint of guidance).  After a stock offering in January 2017, in which the company raised $220 million at a price of $8.30, the company has $537 million in cash and $638 million of debt.  Equity value is $900 million.  As one reference point, in the medium term, say five years out, and a 75% recovery of potential to $400 million of EBITDA, you could see an EV of $2.5 to $3.0 billion and a return  of 150% to 200%.   

Helix’s  2016 EBITDA of approximately $97 million likely will be the trough year in business results, with that number growing in 2017 and 2018 even without much market recovery.  Helix has two new charter vessels, the Siem Helix 1 and 2, coming online this year (under a seven  year contract with Petrobras) that should add $40 million in EBITDA and one additional significant new owned $400 million asset being deployed in 2019, the Q7000.  That completes current major growth CAPX spending. 

Helix Business Description

Helix has three business segments:

Well Intervention – This is a niche market in the offshore business and includes maintenance, enhancement and plugging of wells.  Helix operates rigs fitted with special equipment for these services.  Historically, drilling rigs were typically necessary for subsea well intervention to troubleshoot or enhance production.  Helix intervention vessels serve as work platforms at costs that historically have been less than offshore rigs.  Coming out of past down industry cycles, well enhancement services have been one of the first areas to show improvement.    Enhancing existing aging wells and fields is cheaper than new development and also puts off plug and abandonment costs.  However P&A is regulatory driven and, eventually, is a necessary expense of all existing offshore wells. 

Helix is a leader in this niche market that only includes 25 vessels or so worldwide.  Helix owns five modern vessels with a six the Q7000 to be completed in December 2018 at a cost of approximately $400 million.  In addition, Helix has chartered two new vessels from Siem (Siem Helix 1 and 2) and outfitted them with topside equipment needed to perform well intervention services at a cost of approximately $200 million.  Both those vessels will be performing work for Petrobras offshore Brazil on a seven year contract with options to extend.  

Robotics – The Company operates 52 ROV’s and both owned and chartered support vessels and complimentary equipment that provide deepwater tasks related primarily to oilfield development.  This segment as you would expect is more distressed than the well intervention business.  New field development is at a nadir.  Helix also performs work for wind energy and deep sea cable installations.  Alternative energy currently represents 14% of revenue of this segment.  Robotics recovery path will be longer than the intervention business because it will take an increase in deepwater offshore development activity to improve results. 

Production – HP 1 floating production vessel capable of processing 45,000 barrels of oil per day.   The HP 1 is under contract in the Phoenix field until at least June of 2023.  20% interest in the Independence Hub located in the Gulf of Mexico.  This segment contributes about $25 million of EBITDA per year. 

Capital Requirements

2017 Capital requirements consist of $195 million growth capx consisting of $90 million related to the Q7000 vessel (which will leave one final payment of $140 million at delivery in December 2018), $85 million to complete the Siem Helix 1 and 2 vessels and $20 million in intervention systems.  Maintenance capx consists of $10 million for Q4000 dry docking and $5 million for intervention systems. 

The only significant committed growth CAPX project going forward into 2018 will be the Q7000 mentioned above. 

Debt

Total debt is $639 million and consists of the following: 

$60 million Convertible Notes due 2032 – 3.25% (first put/call date March 2018)

$125 million Convertible Senior Notes due 2022 – 4.25%

$186 million Term Loan – LIBOR + 4.50% (balance due 2018)

$80 million MARAD Debt – 5.00% 

$188 million Q5000 Loan – LIBOR + 2.50% (Annual Amort. Of 14% with $80 million balance due 2020)

Without any potential refinancing, the maturity schedule by year looks like following: 

2017 - $50 million

2018 - $269 million

2019 -  $43 million

2020 - $96 million

2021- $ 7 million

2022 and beyond - $174 million

Helix is currently working on refinancing the Term Loan due in 2018.  They have stated that they may complete the process this quarter.  They will also need to pay off the 2032 bonds in 2018 (based on the put).  They may also refinance this issue.  In the schedule below I demonstrate that the company’s balance sheet can likely survive this brutal market for offshore services.   

The pro-forma below assumes the following:

1)     Status quo in the existing business at low prices and low utilization of assets (50% range). 

2)     The addition of a full year of the Helix 1 and 2 in 2018 forward (7 year contract with Petrobras).

3)      Modest utilization of the Q7000 in 2019 forward.

4)     That Helix accesses financing to replace 50% of the Term loan and 2032 Notes (most likely they do much better than 50%).

5)     That Helix pays all other debt on schedule.

Oil Market Outlook

In order for the investment thesis on Helix to work you have to make a case that the world will require future offshore oil exploration and development to meet demand. 

The sentiment in the oil business seems to be lower for longer.  I don’t necessarily agree.  In the early 80’s oil market crash OPEC capacity behind pipe was in the area of 15 million barrels a day in a market that was 60 million barrels a day.  Today OPEC excess capacity, after the cut in January, is around 2.5 million barrels a day in a 97 million barrel a day market.   In addition, annual world spending on oil and gas CAPX has seen the most dramatic decline ever from 2014 on.  Already over a $500 billion cumulative reduction.  This will have an effect on future oil production.   For the two year period alone (2015 and 2016), the amount of reduced spending represents 10 million barrels a day of supply being deferred or cancelled.  The world needs to add about 6 million barrels a day each year in new production from the decline in existing fields (5 million bbd and 1 million plus bbd in worldwide growth).   To date we have not felt the reduced spending because some of the money spent on projects in boom times prior to 2014 did  not come online until after the crash and is still benefiting supply.  As we move out from here, less of that benefit will be felt and it will take higher spending levels and a bigger piece of the spending pie toward exploration to meet world oil demand. 

In the shorter term, over the next two years, I think we are likely to return to a $70 oil price based on the following.   I think OPEC will continue with the cut until OECD inventories are normalized (most of that oversupply being U.S. inventories).    It is interesting that most analysts had projected the real cut or compliance level at about 50% of the stated goal while it is actually running about 90%.  This is a different OPEC, and I think based on the leader (Saudis) and others budgets being pinched hard.  They must follow through for their fiscal and political survival. 

Few seem to realize that global supply/ demand balance has been drawing since July of 2016 with the exception of January 2017.  January likely had to do with short term supply spurt from OPEC ahead of the OPEC reduction.  The trend in the drawdown in inventories will likely  accelerate this summer when OPEC’s cut combined with seasonal demand patterns work together.  Going forward, baring a recession,  global oil demand growth will likely to outstrip non OPEC supply growth. 

OECD inventories are about 3.1 billion barrels and need to get to about 2.7 billion barrels to be in a normal range.  It is only a matter of time before inventories are balanced.  There exists a high correlation with inventories and price.  I think  as U.S. inventories normalize the price of oil will increase to level that spurs some activity again offshore.  My guess is that it is a one to two year process to balance inventories. 

In a nutshell, offshore oil exploration and development will be needed to meet world oil demand and Helix’s assets will play a part. 

Management Ownership

Mr. Kratz is Chairman and Chief Executive Officer of Helix and has been with the company since 1984.  He currently owns approximately 7 million shares worth $42 million.  His latest large purchase was in 2013 for 1 million shares at approximately $23 per share.  Certainly he has a large vested interest in working to create value for shareholders.  Other members of the management  team also own stock including the CFO who owns 325,000 shares.  

Summary

If you believe that offshore oil development has a significant role to play in meeting world oil demand then I think Helix is a way to get leverage to a recovery with less bankruptcy risk than some of the other names that tend to be highly leveraged and in parts of the market that are even more distressed (i.e. drillers like Noble and Transocean or offshore support vessel companies like Tidewater or Hornbeck) to name a few.  Helix’s is less levered and half its business is in a niche within well intervention that has utility to oil producers throughout the cycle.  If Helix were only in the ROV service market the equity would likely be toast like so many others.   I would welcome comments and opinions on Helix and the future fate of offshore oil. 

Catalyst

Positive Impact of Helix 1 and 2 coming online in 2017 and full year of benefit in 2018 from these new assets.

Increase in price of oil to a range that makes offshore deepwater projects viable