Zacks Investment Research Page 1

Zacks Investment Research Page 1

Helix Energy Solutions Group, Inc. / (HLX – NYSE) / $39.52

Note:All new or revised material since the last report is highlighted.

Reason for Report: Change in Estimates Previous Edition: June 07, 2007

Recent Events

On June 11, 2007, HLX announced that its majority owned subsidiary, Cal Dive International, Inc., has signed a merger agreement to acquire Horizon Offshore, Inc. with a combination of Cal Dive stock and cash.

On May 02, 2007, HLX declared 1Q07 earnings report. Highlights of the results are:

EPS in 1Q07 was $.60 versus $0.67 in 1Q06.
Lowered 2007 earnings range from $3.02–$4.37 to $3.00–$3.90 per share

Overview

Analysts have identified the following factors for evaluating the investment merits of HLX:

Key Positive Arguments / Key Negative Arguments
Fundamentals

Marine construction fundamentals are improving
Solid backlog of work and an improved pricing environment in the Marine Contracting segment
Strong pricing trends

Growth Opportunities

Hurricane damage increased demand for HLX’s services.
Significant margin expansion potential
Strong revenue growth potential
Acquisition of REM is complementary to HLX
Marine contracting business benefits from assets acquired from Torch and Stolt
Acquisition of Fraser Diving increases exposure to Middle East and Asia

/ 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

Helix Energy Solutions Group, Inc., formerly Cal Dive International, Inc. (CDIS), began trading under the ticker symbol of ‘HLX’ on the NYSE from July 18, 2006. The company, headquartered in Houston, Texas, is a leading marine contractor and operator of offshore oil and gas properties and production facilities. It 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 Helix Energy Solutions Group 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 revenues and earnings in an industry as cyclical as energy. In addition to its contracting and production services, it provides, through Helix RDS, extensive reservoir and well technology –from full field management through technical consultation and trouble-shooting. More information about the company is available at HLX operates on a calendar year basis.

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) / 1Q06A / 4Q06A / 1Q07A / 2Q07E / 2006A / 2007E / 2008E
Marine Contracting / $220.8 / $281.1 / $272.3 / $282.7 / $970.9 / $1,183.8↑ / $1,452.5↑
Oil and Gas Production / $80.3 / $123.2 / $131.0 / $140.3 / $430.8 / $722.2 / $936.7
Total Revenue / $291.6 / $395.8 / $396.1 / $411.1 / $1,374.9 / $1,799.0 / $2,217.9
Digest High / $291.6 / $395.8 / $396.1 / $430.5 / $1,407.1 / $1,871.3 / $2,374.9
Digest Low / $291.6 / $395.8 / $396.1 / $400.5 / $1,366.9 / $1,761.0 / $2,103.0
YoY Growth / 35.8% / 34.8% / 72.0% / 30.8% / 23.3%
Sequential Growth / 5.7% / 0.1% / 3.8%

The Zacks Digest average total revenue in1Q07was $396.1M, up35.8% from $291.6M in the equivalent quarter last yeardriven primarily by significant improvements in contracting services revenues due to the introduction of newly acquired assets and improved market conditions.

The Zacks Digest model forecasts total revenue of $1.79B for 2007 and $2.22B for 2008, which reflects a y/y growth of 30.8% in 2007 and 23.3% in 2008. The estimated compound annual growth rate (CAGR) on the realized 2005 revenue is 40.5%.

Marine Contracting

The Zacks Digest average revenue in1Q07was $272.3M,up by 23.3% from $220.8M in the equivalent quarter last year. HLX benefited from the contribution from the Acergy SA (ACGY), Torch, and Helix Fraser acquisitions and the return to service of the express.

Oil and Gas Production

The Zacks Digest average revenue in1Q07was$131.0M, up63.1% from $80.3M in the equivalent quarter last year and 6.3% sequentially from $123.2M in 4Q06 primarily due to the productionadded from the Remington acquisition.

Production Facilities

The equity in earnings contribution from the Marco Polo facility and OSTL (Witch Queen JV) was $6.1M in1Q07, reflecting earnings contribution from the same reaching breakeven. Production tariff income during 1Q07 was negatively impacted by well problems in the K2 field. The combined production was approximately 32,725 boe/d by quarterend versus 46,000 boe/d in 4Q06, as the throughput was negatively impacted by downhole safety valve issues.

Prize Realizations

HLX's realized natural gas price was $7.66/Mcf during 1Q07 versus $9.52/Mcf during 1Q06 and $7.36Mcf in 4Q06.

The realized price for oil was $56.36 per barrel during 1Q07 versus $58.71 per barrel during 1Q06 and $56.11 in 4Q06.

Outlook

The company expects full year 2007 production to range in 85bcfe–95bcfe, with an estimated 2Q07 production in the range of 16–17 bcfe. HLX announced drilling of an exploratory well and two appraisals sidetracks at the Noonan prospect in 2700 of water in Garden Banks Block 506 with a reserve potential of 100Bcfe. This would involve development of subsea tieback to shallow water infrastructure with production initiating in 3Q08. The development can culminate into $100M of revenue in the marine contacting segment.

One firm (Raymond James) expects 2008 should be a strong year for the Oil & Gas segment with the upcoming projects in hand and Marine contracting segment should benefit from higher utilization.

One firm (CapitalOneSC.) expects hurricane-related work to lead to strong demand for marine contracting services in the GOM well into 2007 and with addition of the acquired vessels from Acergy and Torch Offshore and strong market demand; the firm also expects 2Q07 should be another strong quarter for gross profit contribution from the Marine Contracting segment.

Please refer to the Zack’s Research Digest spreadsheet of HLX for specific revenue estimates.

Margins

Margins (%) / 1Q06A / 4Q06A / 1Q07A / 2Q07E / 2006A / 2007E / 2008E
Gross Margin / 35.1% / 38.2% / 34.2% / 36.4% / 43.8% / 49.0%↔ / 54.6%↔
EBITDA Margin / 47.2% / 44.9% / 45.8% / 53.7% / 45.3% / 52.2%↔ / 55.4%↔
Operating Margin / 27.8% / 27.9% / 27.1% / 33.1% / 29.8% / 33.2%↔ / 36.2%↔
Pre-tax Margin / 29.3% / 25.7% / 24.8% / 29.7% / 28.2% / 30.7%↔ / 34.5%↔
Net Income margin / 19.0% / 16.7% / 14.2% / 14.5% / 18.4% / 17.2%↔ / 19.4%↔

The Zacks Digest average gross profit in1Q07was $135.6M, up32.6% from $102.3M in the equivalent quarter last year.

The Zacks Digest average segmental gross profit atMarine Contracting in the first quarter was $94.2M, up 18.3 % from $79.6M in the equivalent quarter last year.

The Zacks Digest average segmental gross profit at Oil and Gas production in the first quarter was $48.6M, up 115.0% from $22.6M in the equivalent quarter last year.

SG&A (as per the Zacks Digest average) during the quarter averaged $30.2M, up43.6% from $21.0M in 1Q06due to increased overhead to support the company's growth.

The Zacks Digest average operating income in 1Q07 was $107.3M, up 32.2% from $81.2M in the equivalent quarter last year.

Interest expenses during the quarter increased to $13M versus $2.5M in 1Q06 primarily due to debt incurred for the cash portion of the Remington acquisition in July 2006.

Outlook

The Zacks Digest model forecasts operating income of $596.6M for 2007 and $803.4M for 2008, which reflects a y/y growth of 45.5% in 2007 and 34.7% in 2008.

One firm (CapitalOneSC.) expects improved performance for Marine Contracting services as deepwater construction and well operations margins increase.

The Zacks Digest model forecasts net income of $310M for 2007 and $430.1M for 2008, which reflects a y/y growth of 22.7% in 2007 and 38.7% in 2008.

The company expects Contracting Services revenues of $1,060–1,200M and 35%–40% EBITDA margins at the Contracting Services segment. In addition, HLX management noted it anticipates $35–45M in contribution from the Production Facilities.

Please refer to Zacks Research Digest spreadsheet of HLX for more details on margin estimates.

Earnings per Share

(US$) / 1Q06A / 4Q06A / 1Q07A / 2Q07E / 2006A / 2007E / 2008E
Zacks Consensus / $0.67 / $0.70 / $0.60 / $0.64 / $2.85 / $3.32 / $4.70
Company Guidance / $3.00-$3.90
Digest High. / $0.67 / $0.75 / $0.60 / $0.72 / $3.87 / $3.60 / $5.35
Digest Low / $0.67 / $0.70 / $0.60 / $0.62 / $2.79 / $3.07 / $4.00
Digest Average / $0.67 / $0.72 / $0.60 / $0.65 / $2.97 / $3.30↓ / $4.63↑
YoY Growth / -10.4% / -21.5% / 54.8% / 11.3% / 40.1%
Sequential Growth / 19.5% / -16.2% / 8.6%

The Zacks Digest average EPS in1Q07was $0.60, down10.4% from $0.67in the equivalent quarter last year primarily due to unexpected downtime on the Q4000 and lower production.

Outlook

HLX lowered 2007 earnings to rangefrom $3.00 to $3.90per share, down from the previous guidance of $3.02–$4.37 per share.Most of the brokerage firms following the stock have lowered the earnings expectation for 2007 to reflect lower Oil and Gas production estimates.

Second quarter results are expected to look similar to the first quarter results, given only minor improvements in production, higher dry-dock activity.

One firm (Natexis Bleichroeder) expects strong earnings and cash flow growth to be a catalyst for HLX in 2008.

One firm (Jefferies) believes the company is likely to produce robust earnings growth through 2009, and likely longer, based on (1) additional oil & gas production at assets acquired at Remington, (2) strong pricing in the company's core Contracting Services segment, and (3) increasing volumes at the company's hub production facilities.

One firm (Raymond James) has lowered 2007 EPS estimates from $3.35 to $3.30 based on better quarterly visibility and 1Q07 results.

The Zacks Digest model forecasts EPS of $3.30 for 2007and $4.63 for 2008, which reflects a y/y growth of 11.3 % in 2007 and 40.1 % in 2008. The CAGR on realized 2005 total earnings is 34.1%.

2007 forecasts (6in total) range from $3.07(Natexis Bleichroeder) to $3.60(Jefferies); the average is $3.30.

2008 forecasts (6in total) range from $4.00 (Stanford) to $5.35 (Jefferies); the average is $4.63.

Please refer to the Zacks Research Digest spreadsheet of HLX for more extensive EPS figures.

Target Price/Valuation

Of thesix brokerage firms covering the stock, five brokers have provided positive ratings on the stock and one broker (Natexis Bleichroeder) has not rated the stock. The Digest average target price of $49.40 (↓from the previous report;25.0% upside from the current market price) lies between the Digest low of $48.00 (21.5% upside from the current price) (Raymond James)and the Digest high of $52.00(31.6% upside from the current market price)(CapitalOneSc.).

Rating Distribution
Positive / 100%
Neutral / 0.0%
Negative / 0.0%
Average Target Price / $49.40↓
Digest High / $52.00
Digest Low / $48.00
Number of Analysts providing Target Price/Total / 5/6

Risks to the price target include a competitive operating environment, declining global economic activity, exploration risk, a potential slow down in offshore drilling activity, significant weakness in commodity prices leading to a decrease in E&P cash flow from its own production, E&P spending on contracting services, and/or investors’ valuation expectations and volatile oil and gas prices.

Please refer to Zacks Research Digest spreadsheet of HLX for further details on valuation.

Capital Structure/Solvency/Cash Flow/Governance/Other

Capital Structure

Helix's net-debt-to-total-capital ratio was 43% at the end of 1Q07 versus 38.0% at the end of 4Q06. HLX ended 1Q07 with cash and cash equivalents of $202.7M and long-term debt of $1.4B. One firm (CapitalOneSC.) expects negative cash flow of approximately $309.5Mafter capital expenditures of $919.0M during 2007 while it expects free cash flow of $216.2M during FY08 after capital expenditures of $620.0M.

Capital Expenditure

HLX forecasts capital expenditures for the remainder of 2007 will range from $650million to $950million. Management believes internally generated cash flow, the cash generated from the Cal Dive initial public offering and borrowings under the existing credit facilities will provide the necessary capital to fund 2007 initiatives.

One firm (Natexis Bleichroeder) expects capital expenditure to be distributed in Contracting services and Oil and gas production to be in the ratio of 55:45. The firm believes HLX will be able to fund its internal capital expenditure program from cash on hand and operating cash flow.

Letter of Intent

HLX announced that it has executed a letter of intent for a subsea infrastructure installation contract valued between $140M and $150M. The project will utilize the Express and Eclipsevessels for approximately 400 days, and work is expected to begin during 4Q07.

Acquisition of Horizon Offshore

Details of the transaction particularly pertinent to Helix shareholders are as follows:

The aggregate consideration for Cal Dive's acquisition is valued at approximately $650M,including approximately $22M of Horizon's net debt as of March 31, 2007.

Cal Dive will finance the cash component of the consideration for the transaction (approximately$302.5M) through borrowings, and that debt will be non-recourse to Helix.

The equity component of the consideration will be funded with approximately 20.4 million shares of Cal Dive common stock and the issuance of this equity will reduce Helix's majority interest in Cal Dive from 73% to approximately 59%.

Acquisition of Remington Oil and Gas Corporation

In 2006, HLX completed the acquisition of Remington Oil & Gas Corporation following the receipt of Remington’s shareholders approval for total consideration of $1.4B (approximately $4.80/mcf), paying approximately 58% with cash and 42% with Helix stock. Per terms of the agreement, each common share of Remington was converted into the right to receive $27 in cash and 0.436 common shares of HLX. To fund the cash portion of the merger consideration Helix entered into an $835M Senior Secured Term B facility, which amortizes 1% per year with a balloon payment due at the end of seven years.

Independence Hub

Helix has invested $92.2M in its 20% interest in the Independence Hub production platform. The platform attained substantial mechanical completion in March2007. Once over, HLX expects to earn $11M per year, or $2.75M per quarter. The platform can sustain a production of 1.0Bcf/day of natural gas in 8,000 water depths. Production is expected to initiate from 3Q07, which will be from 10 separate fields preliminarily. One firm (Raymond James) expects full year of operations of the Independence Hub facility should drive further growth in 2008.

Joint Venture

HLX has entered into a 50:50 joint venture with the AGR Group to convert a tanker into an FPSO for installation in Southeast Asia.

HP1

HLX has acquired Helix Producer 1(HP1) via 50:50 joint venture with KR ROMO. The HP1 will go through conversion in Croatia from a ferry to a floating production and offloading (FPO). The HP1 will have the capacity to produce a maximum of 45,000bop/day and 80mmcf/day. HlX is foreseeing roughly 30,000 bpd of production grossly when the field starts work in mid-2008.

Seawell II

Helix came up with the announcement of constructing another North Sea capable well intervention vessel following the declaration of $250M contract secured by Seawell I for 50% of its time during 2007–2010. Seawell II will be a multi-service international vessel working all across North Sea. Building the same would cost roughly $60M with completion expected by 2H08. As North Sea is a prominently growing market, the vessel can be extensively utilized post late 2008.

Expectations for 2007–2009

In 2007, the company expects to include a full year contribution from the Express, ramp up in tariff income from the Marco Polo production facility, and production from the Independence Hub in 3Q07. The company also hopes to have information in the beginning of the year on the success of its Bishop drilling program.

In 2008, the company expects full-year of contribution from Caesar, the introduction of the Seawell II well-intervention vessel in 4Q08, and the Helix Producer I conversion in 3Q08. It expects production to increase to 105 Bcfe with the startup of Phoenix and Bass Lite in 2H08. Management expects the 2009 results to be driven by full-year contributions from Seawell II and Helix Producer I, as well as potential growth from the Q4500 drill-ship, which should gain board approval in 1H07 depending on the rig market outlook. In 2009, production should rise above 120 Bcfe (per the company’s expectations).

Upcoming Events

August 07, 2007: 2Q07 earnings release expected

Long-Term Growth

Of thesixbrokerage firms covering the stock, only one brokerage firm (Raymond James) has provided a long-term growth rate of 25.0%.

HLX’s near-term prospects appear bright, and it has become focused on improving growth in the long term, which is substantially dependent on the Marine Contracting business. For its part, the future direction of the Marine Contracting business will be dictated by the company’s new strategic focus to become a fully integrated development/reservoir management company with a particular focus on deepwater marginal properties. To this end, the company plans to further develop its capabilities and expand its service offering to become a provider of integrated solutions for marginal field development. HLX is in the process of upgrading few vessels, which will help to generate revenues in the long term.

Additional Well Intervention Vessel named Well Enhancer: Well intervention with non-rig assets should continue to be a growing market. It is typically more cost effective and this new asset will likely be designed to make that differential even more apparent, even during cyclical troughs. Cost involved would sum to $160M and expected delivery is by 2008 end.

Caesar: This will be a large diameter deepwater pipe lay vessel. Conversion should be completed by 2007 end and involve a cost outlay of $138M. It is expected to work in late 2007. Dayrates for this type of vessel should be materially in excess of $200,000/day.

Upgrade of Q4000: The company is upgrading this vessel to give it slim-bore drilling capability early next year. The conversion would take 60 days and will be in shipyard for the same during 1Q07–2Q07.

Noonan a Big Plus: Management indicated that it iscompleting the initial well at the Noonandiscovery. Upondoing so, Helix plans to drill an appraisal well to betterdetermine the resource potential of the reservoir. The development of Noonan with HLX's assets should help the company demonstrate the synergies of its unique two-stranded strategy. Noonan discovery is expected to have reserve potential of at least 100 bcfe. One firm (Natexis Bleichroeder) expects Helix would monetize a portion of its 100% working interest atNoonan in order to finance planned exploration anddevelopment efforts in its Gulf of Mexico inventory, if the second well delivers favorable results.

The company's core strategy is to focus on marginal field production in the deepwater Gulf of Mexico, using the company's offshore construction assets to service the fields, from drilling, to well operations and production, and well-abandonment. This integrated strategy promises to help the company reduce F&D costs on its existing fields while providing a healthy backlog of work for the service component of the business.