Helix Energy Solutions: Strong Prospects For 2024 And Beyond - Buy

Note:

I have covered Helix Energy Solutions Group, Inc. (NYSE:HLX) previously, so investors should view this as an update to my earlier coverage of the company.

Eleven months ago, I urged readers to consider an investment in shares of leading offshore energy specialty services provider Helix Energy Solutions Group, Inc., or "Helix," to gain exposure to an anticipated multi-year recovery in offshore oil and gas services.

In contrast to many offshore drillers, Helix has done quite well for most of the industry downturn, as cash flows have been boosted by a number of high-margin legacy contracts. As a result, the company has not only managed to stay afloat but also has reduced its debt substantially in recent years:

Please note that the decrease in cash last year has been caused by the recent acquisition of the Alliance Group of Companies ("Alliance") for $120 million in cash, a Louisiana-based provider of services in support of the upstream and midstream ‎industries in the Gulf of Mexico shelf, including offshore oil field decommissioning and ‎reclamation, project management, engineered solutions, intervention, maintenance, repair, heavy lift, and commercial diving services:

In late July, the company reported profitable second quarter results with decent free cash flow generation:

Free cash flow would have been even higher without the multi-purpose oil field construction and intervention vessel Q4000 undergoing an extended special periodic survey.

During the quarter, the company bought back 0.75 million common shares at an average price of $6.77 per share thus bringing year-to-date repurchases to 1.41 million shares.

In addition, the company raised full-year expectations substantially:

Considering management's stated target to allocate 25% of free cash flow to share buybacks, total share repurchases this year could exceed $40 million or approximately 3% of outstanding shares at prevailing trading prices.

As stated by management, all of the company's business segments are now expected to outperform original expectations:

Please note that the company repaid $30 million in senior convertible debt earlier this month. In addition, Helix will be on the hook for a $40+ million earn-out payment related to the above-discussed Alliance acquisition in 2024. However, given anticipated further improvements in free cash flow generation next year, this won't be an issue.

Even with Helix allocating some of its free cash flow to share buybacks, the company is likely to end 2023 in a net cash position.

Based on statements made by management on the conference call, 2024 is likely to show further, substantial improvement due to a combination of higher margin contracts and substantially lower regulatory survey requirements.

In sum, management expects the business to do well for years to come (emphasis added by author):

For the next few years, we expect to be in a strong position with high demand for our services across all sectors and regions we operate in, with improving rates and generally better terms and conditions. (...)

The three buckets of our business model, maximizing existing reserves, decommissioning and renewable support remains our foundation and each one shows promise for sustainable growth. We always explore opportunities that prioritize shareholder return with our current focus being on growth within our existing capabilities.

We believe we're being patient and selective with these opportunities and our markets continue to be dynamic. We expect to generate double-digit free cash flow yield going forward. We will be paying attention to our capital structure and debt as well as capital allocation to building cash, share repurchase and growth in a balanced manner to yield what we believe will represent the greatest return to the shareholders.

Valuation-wise, even with shares trading near multi-year highs, Helix remains cheap based on my Adjusted EBITDA estimate of $400 million for next year. Assigning an EV/Adjusted EBITDA multiple of 6x would result in a $15 price target for the stock.

Bottom Line

Helix Energy Solutions Group, Inc. reported better-than-expected second quarter results and raised its full-year outlook substantially.

In addition, the company continued to buy back shares under its $200 million repurchase program.

2024 should be an even better year for Helix as new work is awarded at higher rates, while a number of existing contracts are expected to benefit from price escalation clauses. Moreover, the company is going to benefit from a significantly lower number of scheduled regulatory surveys for its fleet.

With the offshore oil and gas industry still in the early innings of an anticipated multi-year upcycle, investors should use any major weakness in the shares to initiate or add to existing positions.

However, given the most recent rally, I am lowering my rating from "Strong Buy" to "Buy".

With oil prices sitting near year-to-date highs , I remain positive on the entire offshore services industry, including leading offshore drillers Transocean (RIG), Seadrill (SDRL), Valaris (VAL), Noble Corp. (NE), Diamond Offshore Drilling (DO), Borr Drilling (BORR) and support providers like Tidewater (TDW) and SEACOR Marine Holdings (SMHI).

Risks

Not surprisingly, offshore service stocks remain heavily correlated to oil prices so any sustained down move in the commodity would almost certainly result in Helix Energy Solutions Group, Inc.'s shares taking a hit.