Helix Energy Solutions Group, Inc. (NYSE:HLX), headquartered in Houston, is one of the world’s top offshore energy specialty services organizations. The company, a global provider of offshore services, operates in new and existing oil and gas fields, which are divided into three segments: well intervention, robotics, and production facilities. The well intervention accounts for roughly two-thirds of the company’s revenues.
Helix recently paid $120 million in cash for the Alliance group of companies (“Alliance”), a Louisiana-based provider of upstream and midstream services on the Gulf of Mexico shelf, including offshore oil field decommissioning and reclamation, project management, engineered solutions, heavy lift, intervention, maintenance, repair, and commercial diving services.
The purchase will contribute up to $25 million in Adjusted EBITDA and raise consolidated sales by about 15% this year. Helix has fared well during the industry downturn, with financial results enhanced by a number of high-margin legacy contracts. As a result, the company has not only managed to stay afloat but has also significantly decreased debt in recent years: Please keep in mind that the recently completed Alliance transaction will lower cash on hand by $120 million in the coming quarter.
However, management expects 2022 to be a transformation year, with several vessels undergoing regulatory checks, the North Sea market returning slowly, and a number of units performing short-term work at reduced rates, with the company’s two modern well intervention vessels in Brazil alone causing an estimated $35 million EBITDA hit. As a result, the combined company’s free cash flow will be close to break-even, down from $132 million last year: However, as management indicated on the Q2 conference call, things are projected to improve in the second half and next year as business conditions improve across all segments:
“Stronger utilization, rising rates, and, in some parts of the business, rates are improving faster and better than predicted, accompanied by better terms and conditions. We are securing longer-term contracts and anticipate ongoing work with some of the Well Intervention assets through 2025. Not only are the uncertainties of 2022 becoming evident, but we also have maybe the best visibility in recent years for what may happen next year in 2023 at this time. We’ve designated 2022 as a transition year for Helix. We fully intend to move from a low-demand market in 22 to a high-demand market in 23 and beyond.”
Helix estimated up to $127 million in EBITDA improvements in 2023 in the Q2 presentation, based on forecasts for well intervention rates to increase between 30 and 45 percent for the full year compared to rates at the beginning of 2022. Next year, the business expects better usage and rates in the Robotics segment. Personally, I anticipate an Adjusted EBITDA of at least $225 million in 2023, which is more than double the company’s high-end expectation for this year.
At this level, Helix should generate significant free cash flow next year.
Despite current predictions for a multi-year rebound in the offshore oil and gas sectors, Helix looks extremely inexpensive at 2.7x EV / Adjusted 2023 EBITDA.
While 2022 will be nothing to write home about for Helix Energy Solutions, the firm anticipates significant improvement in the coming year, with the potential to at least treble Adjusted EBITDA from 2022 levels. Even after the recent acquisition of Alliance, Helix maintains a robust balance sheet with low net debt levels and adequate cash, which should improve significantly in the next quarters.
Helix appears to be a bargain at just 2.7x estimated EV / Adjusted 2023 EBITDA. However, with shares up nearly 40% from recent lows, investors should consider waiting for a pullback before entering a position.
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