In an April 23 research note, analyst J. Marshall Adkins reported that demand for offshore oil and gas services is rising due to "operational catalysts," and this bodes well for Raymond James' favorite offshore name, Helix Energy Solutions Group Inc. (HLX:NYSE).
This is especially positive for Helix Energy because in Q1/19, the company's EBITDA fell short of Raymond James' estimate by about 10%. It was, however, generally in line with the Street's forecast. "Even though they kept 2019 guidance the same, the recent move up in crude prices seems to have made management incrementally more bullish surrounding its 2019–2020 operational outlook," Adkins noted.
As such, the financial services firm raised its target price on Helix Energy to $10 per share from $9. This compares to $7.93, the current share price.
The analyst presented three primary reasons for the optimism.
One, offshore demand for rigs and well intervention seems to be picking up in the Gulf of Mexico after years of being depressed. "Given the current volume of tendering activity in the region and the tightening asset utilization, Helix feels that the pricing has stabilized and rate increases are possible moving into 2020," Adkins relayed. Accordingly, Raymond James is now modeling about 5% rate increases in 2019 and 2020 for the fleets, assuming 90% utilization.
Two, due to rising Brent prices and the trend of large operators consolidating their operations to core acreage, smaller offshore players appear to be willing to buy lower-priority offshore blocks. This is good for Helix Energy, Adkins explained, because those firms tend to "aggressively allocate capital towards production enhancement and short-cycle work, which is now about 70% of Helix's well intervention business." Raymond James expects this factor alone to increase Helix's margin from 2019 and 2020 well interventions by about 100 basis points.
Three, Helix Energy's use of the Q7000 in offshore Africa has been approved, and the vessel is expected to arrive there in Q4/19. "While we are risking Q4/19 utilization at 50%, we would expect today's higher priced oil environment will translate into long-term sanctioned work in 2020," commented Adkins.
Furthermore, Helix Energy will fund the $112 million necessary for the Q7000 this year. Thus, in 2020, the company's capex will return to a normal level, and its cash flow should be robust, with an estimated 10% free cash flow yield, per Raymond James. "The default risk is minimal on the downside case versus offshore peers," Adkins indicated.
He concluded, "Given 1) the company's strong competitive positioning a niche offshore oilfield service business combined with 2) our expectations for an improving international/offshore upcycle and 3) minimized balance sheet related downside risk (versus offshore drilling peers), Helix remains our favorite offshore, levered oilfield name."
Raymond James has an Outperform rating on Helix Energy.
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Disclosures from Raymond James, Helix Energy Solutions Group Inc., Apr. 23, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analysts J. Marshall Adkins and Praveen Narra, primarily responsible for the preparation of this research report, attest to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months..
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Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Raymond James & Associates, Inc. makes a market in the shares of Helix Energy Solutions Group, Inc.
Raymond James & Associates received non-investment banking securities-related compensation from Helix Energy Solutions Group, Inc. within the past 12 months.
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