Helix Energy Can Take Some Time Before The Turnaround
At this point, Helix Energy Solutions (HLX), like most of the other oilfield services companies, is vulnerable to the ongoing crude oil price vagaries. Despite the increase in tendering activities, seasonality can affect its top-line adversely in the short term. Also, an oversupply of rigs in the Gulf of Mexico and the North Sea will not allow margin to improve in the short term. The fall in the backlog by the end of the year signals the potential revenue loss in 2020. The depressed energy price and offshore projects’ long cycle can prolong the stock’s recovery.
HLX’s well intervention vessel utilization improved significantly in 2019. It is particularly optimistic about the growth opportunities in Brazil and the Q700’s (a semi-submersible vessel) prospect, particularly in West Africa. Before the current energy price debacle, higher offshore tendering activities were leading to higher average day-rates, as early indications pointed out.
The Current Challenges
Investors need to be aware of challenges from the persistently low crude oil prices following the coronavirus outbreak and higher supply from OPEC, doubts have been cast over the feasibility and the actual turnaround times of various projects across the regions. An oversupply in the offshore service segment has kept rates down. While higher offshore tendering activities are likely to see volume improving, the margin is unlikely to be benefited soon. On top of that, the seasonal activity slowdown, which typically starts in Q4 and lasts until the beginning of Q2, will affect HLX’s Well Intervention and Robotics segment performance in the North Sea.
The Well Intervention Business Dynamics
Despite various obstacles withholding the growth potential, HLX’s Well Intervention vessel utilization was steady at a relatively high level in 2019. Globally, it was 92%, although it was a marginal fall from 97% achieved in Q3 2019. In Brazil, it was notably high at 98%. The North Sea (Europe) market has provided stability to the company’s revenues since 2017, although the utilization was relatively low. In the Gulf of Mexico, investment is coming back. The Q5000 (a well intervention vessel), which performs well intervention jobs for BP, will return to the campaign in April. Q4000, another well intervention vessel, is expected to return to activity in March after the maintenance work is completed. The company expects utilization for both of these vessels to remain high, and therefore, we can expect the top-line to increase in Q2 2020.
Investors may note that the company completed the Droshky asset acquisition early in the year. The Q400 fleet, which also worked on a Droshky well, was deployed to production enhancement operation. There has been a rise in the number of production enhancement jobs by the end of 2019. HLX’s Well Enhancer and Seawell performed production enhancement and abandonment work, although the latter was sent for seasonal warm stacking due to scheduled maintenance work.
Overall, the company has scheduled five of the seven Well Intervention assets for maintenance in Q1. So, it will invariably affect Q1 top-line and profit adversely. However, most of these assets will be back in action in 2020 itself, and thus, the recovery should be sharp by the end of the year. Plus, they are expected to remain operational in 2021, which means revenues from the well interventional should be consistent in 2021. Through a couple of well intervention vessels, it plans to cater to West Africa, Asia-Pacific, and Brazil in 2020. The company will look to use Q7000 as a swing vessel transiting from region-to-region.
Q7000 And Other Prospects
Much of the company’s potential lies with the success of the Q7000 vessel. The Q7000 was fully mobilized with services equipment during Q4 2019. It arrived in Nigeria in early January. It completed the first well campaign during the month. The vessel will remain under contract at least until Q2 2020 and will look to cater to various opportunities in West Africa. Regarding the potential for Q700, the company earlier disclosed that short-term contracts are typically showing increasing trends in the well intervention industry. The company’s management believed that at a 50% utilization level, the vessel could achieve breakeven to $20 million contributions in 2020.
Regarding the possibility of a rate increase in the Gulf of Mexico and the North Sea, the company readjusted to market in the North Sea after a couple of legacy contracts carrying lower rates ended in 2020. The utilization rate has improved in these regions. We may see rate improvement in 2020, although there is still an oversupply of rigs in these regions. The situation, however, can improve markedly in 2021 when several rigs will retire. So, I expect all these factors to enhance the company’s financial performance, but the change will be gradual and may transient to 2021.
Robotics Segment Asset Utilization
In the Robotics charter fleet, the utilization decreased drastically to 73% by the end of 2019 from 96% a quarter ago. Most of the fall in utilization can be attributed to the 43 days reduction in the available chartered vessel days following the termination of the Grand Canyon charter in November 2019. ROV, trencher, and ROVDrill utilization was relatively steady, although the overall utilization was still stuck at a low level (41%). Likely, the Robotics segment performance will not improve in the short term. However, the cost structure of the chartered vessels will improve in 2020. Plus, benefits from hedges can partially offset the negative drivers. Overall, the segment result can remain unchanged or may improve modestly in 2020.
As of December 31, 2019, HLX’s backlog was $0.8 billion, which was a 28% decrease compared to a year ago. Lower backlog typically indicates lower visibility into future revenues. Approximately $0.51 billion of the current backlog is estimated to be completed during 2020. A five-year contract with BP (BP) for work in the Gulf of Mexico, two four-year contracts with Petrobras (PBR) for well intervention services offshore Brazil, and a seven-year contract for the HP I account for the 82% of the backlog. The BP contract and the Petrobras contracts expire in 2021.
In FY2020, the company expects its performance to improve but much of its assumptions are based on Q7000 running with high utilization finding substantial opportunities in West Africa. It also assumes the North Sea Well Intervention market to maintain a consistent level of activity in 2020.
So, assuming steady contract awards for the rest of the year, the company estimates that revenues (at the guidance mid-point) will increase by 14% in FY2020, while EBITDA can increase by 8%.
Analyzing The Well Intervention Segment Drivers
In Q4 2019, HLX’s revenues from the Well Intervention segment increased by 17% compared to Q3, following a 7% increase in the previous quarter. Operating income in this segment declined by 59% during the same period. The deterioration was primarily due to lower rates in the Gulf of Mexico, the seasonal slowdown in the North Sea, and lower rental utilization.
Robotics Segment Drivers In Q4
HLX’s Robotics segment revenues decreased by 32% in Q4 compared to a quarter ago. Lower utilization across its assets, including charter vessel, ROV, trencher, and ROVDrill, and fewer vessel trenching days led to the fall. The segment operating profit turned to a mild loss compared to a decent profit ($15.6 million) a quarter ago.
Cash Flows and Debt Profile
In FY2020, the company has $120 million debt repayment obligations, while between 2020 and 2023, it has to repay ~$223 million of debt. A considerable portion of the company’s debt has equity conversion features. Since its liquidity (cash plus revolving credit facility) is strong ($379 million), it faces no repayment risk in the near term.
However, its free cash flow (or FCF) nearly halved in FY2019 compared to FY2018. Capex increased, while cash flow from operations (CFO) declined in the past year, leading to the FCF fall in FY2019. The company’s management expects capex to dip sharply to $50 million in FY2020. Although I do not think the CFO will improve much in FY2020, a much sharper fall in capex can lead to significant improvement (~320%) in the FCF.
HLX’s debt-to-equity ratio (0.24x) is lower than its peers’ average of 0.3x. Oceaneering International (NYSE:OII) has higher leverage (0.74x), while Dril-Quip, Inc. (DRQ) has not debt. Low leverage compared to peers can be advantageous if the energy environment deteriorates and debt repayment becomes difficult. However, over the medium term, the company, without refinancing, may need to improve cash flows to avoid strain on the balance sheet.
What Does The Relative Valuation Imply?
Helix Energy is, currently, trading at an EV/EBITDA multiple of 4.3x. The forward EV/EBITDA multiple is ~4.0x. Between FY2015 and now, the company’s average EV/EBITDA multiple was 8.6x. So, it is currently trading at a discount to its past average.
HLX’s forward EV-to-EBITDA multiple compression versus its adjusted trailing 12-month EV/EBITDA is lower than peers, which implies a less steep rise in the EBITDA in the next four quarters compared to peers. This would typically result in a lower current EV/EBITDA multiple compared to the peers. HLX’s current EV/EBITDA is lower than the peers’ average (9.6x). I have used estimates provided by Seeking Alpha in this analysis.
According to data provided by Seeking Alpha, six sell-side analysts rated HLX a “buy” in March (includes “very bullish”), while two recommended a “hold.” None recommended a “sell.” The consensus target price is $8.81, which at the current price, yields 314% returns.
What’s The Take On HLX?
In 2019, the offshore and deepwater projects were seemingly rebounding from the past three-year trough. Accordingly, Helix Energy’s well intervention vessel utilization improved significantly in 2019. The company is particularly optimistic about Q700’s prospect, particularly in West Africa. It also seeks growth opportunities in Brazil. The average day rates are starting to strengthen, particularly in the harsh-environment segment, according to a Rystad study.
However, the crude oil price crash looks to dash the hopes of a top-line revival in the short term. With many well intervention vessels going through maintenance, the company will lack the volume of project work in Q1. Also, an oversupply of rigs in the Gulf of Mexico and the North Sea will not allow margin to improve in the short term. A significant fall in free cash flow in FY2019 was a concern for HLX. However, in FY2020, a steep fall in capex and a steady cash flow from operations would lead to significant improvement in FCF. In the current energy environment, the company might want to stabilize cash flows to avoid strains on the balance sheet given its debt maturity profile.
I think the slow translation of tendering activity into actual project commencement in the offshore and subsea segment can prolong the stock’s recovery. But there is strong potential for the stock’s rebound in the medium-to-long-term.
The Daily Drilling Report
We hope you have enjoyed this Free article from the Daily Drilling Report Marketplace service.
The oil industry is in tatters with most shares down 15-20% over the last month alone. We think better days lie ahead and plan to chart a course through the minefield of broken companies to those that can regain growth prospects. We cover more service companies than any other Marketplace service to help you pick and choose opportunities.
Give it some thought. A 2-week free trial is applicable, so you risk nothing. If you have been thinking about subscribing, it may be time to act!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.