Helix Energy Solutions Group, Inc.
(HLX) NYSE
Recommendation: BUY
Price (10/3/14): $21.55
Company Overview

Founded in 1960

Headquartered in Houston, Texas

President and CEO: Owen Kratz

Sub-industry: Oil & Gas Services & Equipment

Market Cap: 2.28 Billion

Areas of operation: North Sea, Asia Pacific, Gulf of Mexico, and West
Africa
Investment Thesis

Helix is at the turning point of their company strategy to restructure
by divesting in subsea construction and paying down a large amount of
debt

The core of the business moving forward is increasing, and their capex
expenditure is focused on a smaller area of the business improving
margins and capacity

Significant cost advantage and mobility give companies an incentive
to work with them to maximize rig efficiency

The Deepwater economics suggest an increase in capex in the years to
come

Strong commitment from the EU on off-shore wind farming

2 billion dollar back log and a new 4 year deal with options to extend
with Petrobras and BP
Four Areas of Business
1.
Well intervention
2.
Robotics (ROVs)
3.
Subsea Construction
4.
Production Facilities
Well Intervention

Engineer, manage and conduct well
construction, intervention and asset
retirement operations in depths from
200 to 10,000 feet

Q4000 – multi-service semi-submersible
vessel set a series of well intervention
“firsts” in increasingly deeper water
without the use a traditional rig

Significant cost and mobility advantage

Increasing demand for subsea tree
installations

Deal signed with Petrobras and BP

Q5000 delivered in 2015 and Q7000 in
2016
Robotics (ROV)

Marine construction increasingly moving to deeper waters

Fleet: 51 ROV’s, 4 trenching system, and 2 ROV drills

New five year deal inked with McDermott

Offshore alternative energy is increasing in demand (Northern European wind farming)
and was 9% of revenue in 2013 with significant upside potential for 2014 and beyond
Subsea Construction

Sold equipment and
operations in pipe lay in
2013 and January 2014

Focus on well
intervention and robotics
Production Facilities

Own the HP I floating production
unit contracted out until at the
very least Dec 31, 2016

Own significant interest in
Independence Hub platform &
Deepwater Gateway

Formerly its own segment Oil and
Gas but now is not the focus of
the core business for Helix

CGA contract agreement sign 2011
for HFRS containment
Risk and Customers
Risks

Oil and Natural Gas prices
Major Customers

Shell

Petrobras

British Petroleum

Weather

Government Regulation

McDermott

Damage and Upgrade Cycle

Over 65 customers, none of whom
represent more than 10% of revenues
Top-Down

Energy sector as a whole has taken a major hit

Oil prices continue to slide

Deepwater Capex is projected to rise significantly in the next decade

With Capex on the rise companies look to helix to provide well
intervention services at a significant cost advantage

Eurozone Regulation attempting to make 35% of its electrical from
alternatives, and 12% of that from off-shore wind farming
Deepwater Capex Projections
Key Ratios

P/E: 11.22

Current Ratio: 3.18

Since 2009 Cut there total debt by more than half

Debt/Equity: 0.3

ROE: 12.77%

ROA: 7.52%

Profit Margin: 19.34%

Debt-to-Assets: 40%
Comparables
Key Statistics
HLX
OII
SPM.MI
OIS
EXH
TDW
CKH
Industry
MKT Cap
2.27B
6.76B
6.92B
3.22B
2.82B
1.90B
1.48B
--
P/E
11.22
13.49
11.41
14.03
27.09
7.46
23.04
16.83
PEG(5 yr expected)
1.03
0.73
0.69
-7.44
5.32
1.78
0.63
0.98
P/S
2.27
1.97
0.53
1.17
0.98
1.29
1.14
2.62
P/B
1.41
3.18
1.43
2.5
1.6
0.71
1.02
3.15
Profit Margin
EPS
ROE
19.34% 11.36%
1.82
3.68
12.77% 19.74%
2.37%
0.7
6.88%
11.07% 3.75% 10.35% 5.47%
5.57
1.58
3.09
3.43
6.98%
0.85
14.19% 3.25% 5.80% 5.54% 15.51%
Chart Compared to NYMEX Brent Crude
First Two Quarters of 2014
Net Revenues-Well Intervention
Robotics
Subsea Construction
Production Facilities
Intercompany elimination
Total
Three Months Ended, June
30
2014
2013 % Increase
181,218
99,323
82%
119,704
88,374
35%
37,659
24,049
24,174
-1%
-19,384
-17,352
12%
305,587
232,178
32%
Six Months Ended, June
30
2014
2013 % Increase
340,918 205,655
66%
207,594 152,570
36%
358
65,185
47,189
44,567
6%
-36,900
-38,370
-4%
559,159 429,607
30%
Weighed Average Cost of Capital (WACC)
Assumptions
Risk-Free Rate of Return (Rf)
Expected Market Return (Rm)
Market Risk Premium (Rm - Rf)
Size Premium
Specific Company Risk Premium
Levered Beta (Industry)
Unlevered Beta (Industry)
Debt/Equity (Industry)
Debt/Equity (Company)
Re-levered Beta (Company)
Equity/(Debt+Equity) (Company)
Debt/(Debt+Equity) (Company)
Preferred/(Debt+Preferred+Equity) (Company)
Pre-Tax Cost of Debt (Rd)
Cost of Preferred (Rp)
Federal Income Tax Rate
2.5%
6.9%
4.4%
0.0%
2.0%
1.00x
1.30x
53.5%
34.5%
1.59x
58.9%
41.1%
0.0%
4.11%
0.0%
35.0%
WACC Sensitivity Analysis
WACC Calculation
Market Risk Premium
multiplied by: Levered Beta
Adjusted Market Risk Premium
plus: Risk-Free Rate of Return
plus: Size Premium
plus: Specific Company Risk Premium
Cost of Equity
multiplied by: E/(D+E)
Cost of Equity
4.4%
1.59x
7.0%
2.5%
0.0%
2.0%
11.5%
58.9%
6.7%
Pre-Tax Cost of Debt
multiplied by: (1-Tax Rate)
After-Tax Cost of Debt
multiplied by: D/(D+E)
Cost of Debt
4.11%
65.0%
2.7%
41.1%
1.1%
Cost of Preferred (Rp)
Multiplied by: P{(D+P+E)
Cost of Preferred Portion
WACC
0.0%
0.0%
0.0%
7.84%
Discounted Cash Flow Analysis
Valuation Date 10/1/2014
(thousands USD)
Total Revenue
EBITDA
less: Depreciation and Amortization
EBIT
less: Taxes (23.73%)
Net Income
plus: Depreciation and Amortization
less: Total Capex
less: Increase in Working Capital
Unlevered Free Cash Flow
Weighted Average Cost of Capital
Discount Period
Present Value of Free Cash Flows
Total Present Value of Free Cash Flows
FYE: 12/31,
2014
2015
2016
2017
2018
2019
$1,051,873
$1,262,248
$1,640,922
$2,133,199
$2,666,499
$3,199,798
319,656
383,587
498,663
648,262
810,328
972,394
(118,242)
(141,890)
(184,458)
(239,795)
(299,743)
(359,692)
201,414
241,697
314,206
408,468
510,584
612,701
(47,796)
(57,355)
(74,561)
(96,929)
(121,162)
(145,394)
153,618
184,342
239,645
311,538
389,423
467,307
118,242
141,890
184,458
239,795
299,743
359,692
(174,951)
(209,941)
(272,923)
(354,800)
(443,500)
(532,200)
(14,390)
(17,268)
(49,228)
(63,996)
(66,662)
(43,773)
82,520
99,024
101,952
132,537
179,004
251,026
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
0.125
0.750
1.750
2.750
3.750
4.750
$
81,745 $
93,572 $
89,331 $
107,683 $
134,857 $
175,362
$
682,549
Present Value of Terminal Value
Terminal Unlevered FCF
Long-Term Growth Rate
WACC
Terminal Value
Discounted Terminal Value
Present Value of Company
Total Present Value of Free Cash Flows
Discounted Terminal Value
Present Value
less: Net Debt
Present Equity Value
Terminal
2019
$
$
$
$
682,549
3,060,651
3,743,200
113,000
3,630,200
Estimated Fair Value Per Share
Current Share Price
Potential Upside
$ 34.46
$ 21.55
59.89%
251,026
2.0%
7.84%
4,381,247
$3,060,651
Sensitivity Analysis
WACC Value Per Share
6.00% $
51.79
7.00% $
40.79
8.00% $
33.48
9.00% $
28.28
10.00% $
24.38