helix energy solutions group, inc. (hlx) nyse recommendation: buy price (10/3/14): $21.55
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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
Weather
Government Regulation
Damage and Upgrade Cycle
Major Customers Shell
Petrobras
British Petroleum
McDermott
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 19.34% 11.36% 2.37% 11.07% 3.75% 10.35% 5.47% 6.98%
EPS 1.82 3.68 0.7 5.57 1.58 3.09 3.43 0.85
ROE 12.77% 19.74% 6.88% 14.19% 3.25% 5.80% 5.54% 15.51%
Chart Compared to NYMEX Brent Crude
First Two Quarters of 2014
Net Revenues-- 2014 2013 % Increase 2014 2013 % IncreaseWell Intervention 181,218 99,323 82% 340,918 205,655 66%Robotics 119,704 88,374 35% 207,594 152,570 36%Subsea Construction 37,659 358 65,185Production Facilities 24,049 24,174 -1% 47,189 44,567 6%Intercompany elimination -19,384 -17,352 12% -36,900 -38,370 -4%Total 305,587 232,178 32% 559,159 429,607 30%
Three Months Ended, June 30
Six Months Ended, June 30
Weighed Average Cost of Capital (WACC)Assumptions WACC Sensitivity Analysis
Risk-Free Rate of Return (Rf) 2.5%Expected Market Return (Rm) 6.9%Market Risk Premium (Rm - Rf) 4.4%Size Premium 0.0%Specific Company Risk Premium 2.0%Levered Beta (Industry) 1.00xUnlevered Beta (Industry) 1.30xDebt/Equity (Industry) 53.5%Debt/Equity (Company) 34.5%Re-levered Beta (Company) 1.59xEquity/(Debt+Equity) (Company) 58.9%Debt/(Debt+Equity) (Company) 41.1%Preferred/(Debt+Preferred+Equity) (Company) 0.0%Pre-Tax Cost of Debt (Rd) 4.11%Cost of Preferred (Rp) 0.0%Federal Income Tax Rate 35.0%
WACC Calculation WACC Sensitivity Analysis
Market Risk Premium 4.4%multiplied by: Levered Beta 1.59x
Adjusted Market Risk Premium 7.0%plus: Risk-Free Rate of Return 2.5%plus: Size Premium 0.0%plus: Specific Company Risk Premium 2.0%
Cost of Equity 11.5%multiplied by: E/(D+E) 58.9%
Cost of Equity 6.7%
Pre-Tax Cost of Debt 4.11%multiplied by: (1-Tax Rate) 65.0%
After-Tax Cost of Debt 2.7%multiplied by: D/(D+E) 41.1%
Cost of Debt 1.1%
Cost of Preferred (Rp) 0.0%Multiplied by: P{(D+P+E) 0.0%
Cost of Preferred Portion 0.0%
WACC 7.84%
Discounted Cash Flow AnalysisValuation Date 10/1/2014
FYE: 12/31, Terminal(thousands USD) 2014 2015 2016 2017 2018 2019 2019
Total Revenue $1,051,873 $1,262,248 $1,640,922 $2,133,199 $2,666,499 $3,199,798EBITDA 319,656 383,587 498,663 648,262 810,328 972,394
less: Depreciation and Amortization (118,242) (141,890) (184,458) (239,795) (299,743) (359,692) EBIT 201,414 241,697 314,206 408,468 510,584 612,701
less: Taxes (23.73%) (47,796) (57,355) (74,561) (96,929) (121,162) (145,394) Net Income 153,618 184,342 239,645 311,538 389,423 467,307
plus: Depreciation and Amortization 118,242 141,890 184,458 239,795 299,743 359,692 less: Total Capex (174,951) (209,941) (272,923) (354,800) (443,500) (532,200) less: Increase in Working Capital (14,390) (17,268) (49,228) (63,996) (66,662) (43,773)
Unlevered Free Cash Flow 82,520 99,024 101,952 132,537 179,004 251,026 Weighted Average Cost of Capital 7.84% 7.84% 7.84% 7.84% 7.84% 7.84%Discount Period 0.125 0.750 1.750 2.750 3.750 4.750
Present Value of Free Cash Flows 81,745$ 93,572$ 89,331$ 107,683$ 134,857$ 175,362$ Total Present Value of Free Cash Flows 682,549$
Present Value of Terminal ValueTerminal Unlevered FCF 251,026$ Long-Term Growth Rate 2.0%WACC 7.84%
Terminal Value 4,381,247 Discounted Terminal Value $3,060,651
Present Value of CompanyTotal Present Value of Free Cash Flows 682,549$ Discounted Terminal Value 3,060,651
Present Value 3,743,200$ less: Net Debt 113,000
Present Equity Value 3,630,200$
Estimated Fair Value Per Share 34.46$ Current Share Price 21.55$ Potential Upside 59.89%
Sensitivity AnalysisWACC Value Per Share
6.00% 51.79$ 7.00% 40.79$ 8.00% 33.48$ 9.00% 28.28$
10.00% 24.38$
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