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Helix Energy Solutions Group, Inc. / (HELX - NASDAQ) / $39.30Note: All new or revised material since the last report is highlighted.
Reason for Report: HELX completes Remington acquisition. Previous Edition: May 17, 2006
Overview
Helix Energy Solutions Group, Inc. (HELX), formerly known as Cal Dive International, Inc. (CDIS) began trading under the ticker symbol of ‘HELX’ on the NASDAQ exchange on March 6, 2006. The company intends to pass on the Cal Dive name to its shallow-water Marine Contracting segment. The company, headquartered in Houston, Texas, is an energy services company, which provides alternate solutions to the oil and gas industry worldwide for marginal field development, alternative development plans, field life extension and abandonment, with service lines including subsea intervention, reservoir management, facilities ownership, and oil and gas production. It is a leading marine contractor and operator of offshore oil and gas properties and production facilities through its oil and gas subsidiary, Energy Resource Technology (ERT). The company seeks to align the interests of the producer and the contractor by investing in mature offshore oil and gas properties, hub production facilities and proven undeveloped reserve plays where HELX adds value by deploying vessels from its diverse contracting fleet. This unique integration of marine contracting and oil and gas operations is designed to add stability to revenue and earnings in the cyclical energy industry. HELX has established a corporate culture in which environment, health and safety (EHS) are embraced as core business values. More information about the company is available on the company’s website: www.helixesg.com. HELX operates on a calendar year basis.
Analysts have identified the following factors for evaluating the investment merits of HELX:
Key Positive Arguments / Key Negative ArgumentsFundamentals
· Marine construction fundamentals are improving
· Solid backlog of work and an improved pricing environment in the Marine Contracting segment
Growth Opportunities
· Hurricane damage increased demand for HELX’s services.
· Significant margin expansion potential
· Strong revenue growth potential
· Current PUD projects could significantly increase overall production
· Acquisition of REM is complementary to HELX
· Marine contracting business benefits from assets acquired from Torch and Stolt / Fundamentals
· Dwindling reserve base
· The high cost of reserves may challenge the company’s operating performance
· The offshore construction market is competitive and there is significant overcapacity
Macro Issues
· Volatile oil and gas prices
Recent Events
On July 3, 2006, HELX completed the acquisition of Remington Oil & Gas following the receipt of Remington’s shareholders approval. The company on the same date increased its 2006 and 2007 EPS guidance range to $3.20-$3.70 and $4.00-$5.50, respectively, and was authorized by its Board of Directors to purchase up to $50M of the company’s common stock in the open market.
On July 3, 2006, HELX’s listing was transferred from NASDAQ to NYSE where it will begin trading under the ticker symbol HLX from July 18, 2006.
On May 31, 2006, HELX’s wholly-owned subsidiary, Cal Dive International, Inc. filed with the Securities and Exchange Commission (SEC) form S-1 for initial public offering (IPO) of a minority interest of its common stock. The offering would be made only by means of a prospectus and would commence after the registration statement filed with the SEC becomes effective.
On May 2, 2006, HELX released its financial results for the period ended March 31, 2006. EPS from continuing operations was $0.67 (vs. $0.35 in 1Q05). Results benefited from strong performance and improving market conditions at the company’s Marine Contracting segment.
Revenue
The company operates primarily through four reportable segments Contracting Services, Shelf Contracting, Oil & Gas Production, and Production Facilities. The results of the Contracting Services and Shelf Contracting segments are combined into the Marine Contracting segment. The table below details historical and analysts’ consensus estimates:
Revenue ($ in M) / 1Q05A / 1Q06A / 2Q06E / 3Q06E / 4Q06E / 2006E / 2007EMarine Contracting / $101 / $221 / $241↑ / $254↑ / $267↑ / $954↑ / $943↑
As a % of Total Revenue / 63.0% / 75.7% / 73.5% / 60.0% / 59.4% / 66.3% / 59.7%
Oil & Gas / $63 / $80 / $87 / $172↑ / $195↑ / $507↑ / $884↑
As a % of Total Revenue / 39.7% / 27.5% / 26.5% / 40.7% / 43.4% / 35.3% / 48.6%
Total Revenue / $160 / $292 / $328↑ / $423↑ / $450↑ / $1,438↑ / $1,817↑
Digest High / $160 / $292 / $334 / $426 / $475 / $1,530 / $2,153
Digest Low / $160 / $292 / $320 / $417 / $425 / $1,223 / $1,400
Y-o-Y Growth / 82.7% / 96.7% / 102.1% / 70.5% / 79.9% / 26.4%
Q-o-Q Growth / 10.5% / 12.3% / 29.2% / 6.4%
The company recorded total revenue of $292M, up 82.7% from $160M in 1Q05. The results benefited from significant improvement in the contract services market revenue due to the introduction of newly acquired assets (acquisition of vessels from Torch and Stolt) and improved market conditions, offsetting lower oil and gas production volumes. The Marine Contracting segment (including Contracting Services and Shelf Contracting) contributed 76% to total revenue in 1Q06 vs. 63% in 1Q05. The Oil and Gas segment accounted for 28% of first quarter total revenue vs. 40% in 1Q05.
The Digest model forecasts total revenue of $1.44B for 2006 and $1.82B for 2007, which reflects y/y growth of 79.9% in 2006 and 26.4% in 2007. The estimated compound annual growth rate (CAGR) on the realized 2004 revenue is 49.6%.
Marine Contracting
Marine Contracting revenue totaled $221M in 1Q06, representing an increase of 119.7% y/y from $101M in 1Q05. Results benefited from strong market demand, improved utilization rates and contract pricing, and the addition of assets acquired from Torch and Stolt in 3Q05 and 4Q05. Shelf constructing fleet utilization during 1Q06 was 90% vs. 50% in 1Q05 while utilization of shelf contracting vessels declined to 71% in the quarter from 96% in 1Q05 due to unscheduled downtime during the quarter.
Outlook – The combination of increased spending on offshore field development and the incremental repair and maintenance work imposed by the recent hurricanes bode well for all segments in HELX’s Marine Contracting segment. The demand for the company’s marine assets is strong. The strong demand has enabled HELX to introduce its newly acquired assets at high utilization rates, leading to significant revenue enhancement. The company expects demand for platform repair and pipeline reroute services in 2006.
The company raised its Marine Contracting segment’s revenue guidance for 2006 to a rage of $900-$1000M from $650-$750M, and introduced 2007 guidance of $1,000-$1,100M.
One firm (CapitalOneSC.) believes hurricane-related work will lead to strong demand for marine contracting services in the GOM during 2007. It expects strong results in 2Q06 with the addition of vessels from Stolt and Torch Offshore. It added bidding activity is particularly strong for deepwater tie-back pipe-laying work. It believes higher deepwater drilling rig rates will prove to be positive for demand and pricing for Q4000 and Seawell. In addition, the company expects its Seaway Kestrel (pipelay and dive support acquired from Acergy SA in March, 2006) and Caesar (deepwater pipelay acquired in January 2006 for $27.5M) vessels to commence operations during 3Q06 and mid-2007, respectively.
Oil and Gas Production
Revenue from the Oil and Gas Production segment was $80M in the quarter, up $17M from $63M in 1Q05. The increase was primarily due to the rise in oil and natural gas prices realized. The average realized natural gas price of $9.52 per mcf, net of hedges in place, during 1Q06 was 43% higher than the $6.64 per mcf realized in 1Q05, while average realized oil prices, net of hedges in place, increased 33% to $58.71 per bbl in 1Q06 from $44.02 per bbl realized during 1Q05. These increases were partially offset by a production decrease of 11% (8.1 bcfe for the three months ended March31, 2006 compared to 9.0 bcfe in the prior year period) primarily due to production shut-ins due to hurricanes Katrina and Rita . However, oil and gas production is currently at or near pre-hurricane levels.
Outlook – During 2005 and early 2006, the company made six development property acquisitions comprising a 30% interest in the Telemark discovery, a 22.5% (down from 37.5 as 15% was swapped for 40% interest in Tiger prospect during 2005) interest in the Bass Lite discovery, a 50% interest in the Devil’s Island discovery, a 50% interest in the Tulane prospect, a 40% interest in Tiger, and a 20% interest in Huey. These acquisitions could expand the company’s reserves by an estimated 130-200 bcfe, not including the effects of the recent swap between the Tiger and Bass Lite discoveries. HELX’s portion of the development costs for each of these projects is expected to total $300-375M over the next three years. These projects are expected to generate $90-120M of marine contracting work. While additional well work could increase production next year, the drilling and completion of the four PUD projects would be major production drivers heading into 2007. The company expects production of 57-62.5 bcfe in 2006 and 90.5-109.5 bcfe in 2007.
Hedging – HELX has hedged approximately 1,500 thousand barrels of crude oil at an average price of $44-$70.48 for 2006 and nearly 600 thousand barrels of crude oil at an average price of $40-$62.15 for 2007. The company has also forward-sold 606 thousand barrels at an average price of $70.70. The company has hedged natural gas production of approximately 7,200 mmcf at an average price of $7.25-$13.40, 6,600 mmcf at an average price of $8.00-$13.68 and 2,796 mmcf at an average price of $7.50-$10.79. The company forward sold 8,700 mmcf at an average price of $9.28.
Production Facilities
The equity in earnings contribution from the Marco Polo facility rose to $3.4M during 1Q06 from $1.7M during 1Q05. Production tariff income during the quarter was affected by the mechanical shut-in of the first K2 field well tied back to the Marco Polo production platform (this well resumed production during March). The first K2 North well commenced production according to plan in mid-January and five more wells would be brought online by the end of the year from K2, K2 North, and the Genghis Khan fields. The company expects equity in earnings contribution in 2006 and 2007 to range between $20-24M and $45-$55M, respectively. The Independence Hub remains on schedule to commence operations in early 2007.
Please refer to Zack’s Research Digest spreadsheet of HELX for specific revenue estimates.
Margins
Margins (%) / 1Q05A / 1Q06A / 2Q06E / 3Q06E / 4Q06E / 2006E / 2007EGross Profit Margin / 35.3% / 35.1%
EBITDA Margin / 43.2% / 48.7% / 46.0% / 50.5% / 52.0% / 53.4% / 59.6%
Operating Income Margin / 27.3% / 27.8% / 33.8% / 34.5% / 36.9% / 34.6% / 40.4%
Pre-tax Margin / 25.8% / 29.3% / 33.6% / 30.8% / 33.6% / 32.7% / 38.3%
Net Margin / 17.7% / 19.0% / 21.7% / 20.0% / 21.8% / 21.4% / 25.0%
HELX’s gross profit in the quarter increased 81.4% to $102M from $56M in 1Q05 supported by the increased revenue base. Marine Contracting represented approximately 77.8% of the company’s total gross profit while Oil and Gas Production represented the remaining 22.1%. S&A during the quarter averaged $21M, an increase of 64.1% from $13M in 1Q05. DD&A and net interest expense in the quarter increased substantially y/y to $54M and $2.5M in the quarter, respectively. Net income averaged $55M, representing an increase of 96.5% from $28M in 1Q05.
Marine Contracting
Gross profit in the Marine Contracting was $80M in 1Q06, up 279% from $21M earned in 1Q05. The gross profit margin increased to 36.1% in the quarter from 20.95 in 1Q05 driven by higher activity levels and hurricane-related inspection and repair work. The company expects Marine Contracting EBITDA margin to range between 35-40% (vs. previous 35-35%) in 2006 and 35-40% in 2007.
Oil and Gas Production
Gross profit in the Oil and Gas Production segment was $23M in the quarter, a y/y decline of 36.2% from $35M in 1Q05. The decline was caused by the write-off of a mechanical drilling failure at the Tulane prospect. Due to mechanical difficulties experienced at this well in late March, the company decided the wellbore should be plugged and abandoned. A new well plan is being evaluated for this project. This is the only deepwater project where HELX was funding 100% of the drilling costs for a 50% interest.
Please refer to Zacks Research Digest spreadsheet of HELX for more details on margin estimates.
Earnings per Share
1Q05A / 1Q06A / 2Q06E / 3Q06E / 4Q06E / 2006E / 2007EZacks Consensus / $0.35 / $0.67 / $0.72 / $0.79 / $3.35 / $4.25
Company Guidance / $3.20-$3.70 / $4.00-$5.50
Digest Average / $0.35 / $0.67 / $0.79↑ / $0.87↑ / $0.98↑ / $3.34↑ / $4.38↑
Digest High / $0.35 / $0.67 / $0.86 / $0.89 / $1.13 / $3.53 / $5.24
Digest Low / $0.35 / $0.67 / $0.71 / $0.83 / $0.88 / $3.11 / $3.22
Y-o-Y Growth / 91.4% / 121.1% / 65.4% / 30.9% / 73.8% / 31.4%
Q-o-Q Growth / -10.7% / 17.2% / 10.6% / 13.1%
The company recorded earnings from continuing operations of $0.67 per diluted common share in 1Q06, representing an increase of 91.4% from $0.35 per share in 1Q05. Results were driven by strong performance and improving market conditions for the company’s Marine Contracting segment. GAAP earnings in the quarter were $0.67 per share.