Helix Energy Solutions Group, Inc. (HLX)

HLX is an aggregation of complementary businesses; finding/developing oil & gas (E&P), and contract servicing for oil and gas producers. The contracting service unit can be divided into shallow and deep water operations (management has deemed the shallow segment non-core going forward).

The market doesn't seem to get HLX's double barreled approach, despite its strategic appeal, and is offering savvy investors the opportunity to purchase a large and growing stream of income through its contracting segment, as well as substantial oil and gas properties at a modest price.

Their proprietary technology in the deep water realm, should fuel large and rising margins for the foreseeable future. Add some very interesting drilling equipment that is difficult and time consuming to replicate, and a promising group of conservative development properties which can be drilled at their leisure as contracting rates decline and a very attractive long term dynamic begins to emerge.

By the end of '08, a variety of catalysts will drive this stock considerably higher...especially as the market comes to its senses and rewards this business with a much more appropriate valuation, one commensurate with the value of its underlying asset base as well as its rapidly strengthening earnings power. High oil prices, and the tight services market should provide quite a tailwind...but its rapidly growing contracting backlog and the addition of 3 new upgraded vessels (during the 4th quarter) with the ability to lay pipe under water and hence to contract new rates at considerably higher prices...as well as 3 new oil fields that should come online during the second half of the year (which should double HLX's current run rate on production) should be more than enough for the street to sit up and take notice.

The bottom line is that Helix is close to emerging from a heavy investment phase, and should hit an inflection point regarding it's free cash generation capabilities by the end of the year...when it does, Mr. Market is likely to have a change of heart, with the result being shares trading hands at prices significantly above today's level.

The stock has been beaten down, but I feel that the oil services stocks will be growing as long as oil stays above $40-$50. PEG of only .25! Growth rate astronomical. Last I heard they were still fully booked trying to fix the damage on the rigs from last year's hurricanes. Has diversified into getting paid to take over production of mature wells and use their technology to squeeze out the remainder before decomissioning.

HLX is simply to cheap for a (primarily) capital light, competitively advantaged company with above average growth prospects and a long paper trail of earning above average returns for its shareholders.

Reasons for my conviction stem from its ludicrous current undervaluation (based on almost any metric, relative and absolute) as well as the variety of levers management has at its disposal to improve profitability and grow the top and bottom line over the next few years.

For one, HLX is emerging from a heavy investment phase and should hit an inflection point regarding it's free cash generation capabilities at some point over the next year. A few additional levers that mangement may utilize to drive returns over the next few years include...

1. The spin-off or outright sale of its more capital intensive E&P business (in the case of a spin-off I believe both companies would warrant higher valuations as independent pure plays rather than continuing as a combined entitiy).

2. Execution of revenue and margin enhancement strategy. I believe this likely for a variety of reasons, a few of which include...

On the sales side of the equation...

Future sales growth should be achieved through continued growth within its rapidly growing contracting segment. Underlying business drivers here include the addition of 3 new upgraded vessels (during the 4th quarter) with the ability to lay pipe under water. Demand for such vessels is considerable, and likely to only get stronger (at least for awhile). I expect additional top line growth on the E&P side as well. 3 new oil fields are scheduled to come online during the fourth quarter, with full production by the second half of '09 (which should roughly double HLX's current run rate). Higher oil prices and the tight services market should provide a decent tailwind here.

On the margin side of the equation...

Margin expansion should be driven by a combination of increasing asset utilization, reduced costs (less maintence capex), and a mix shift to its faster growing, higher margin business going forward (to name a few).

On the contracting side...the addition of the 3 new upgraded vessels (with enhanced capabilities) should allow HLX to deploy these ships at new, more profitable rates going forward. Considering these vessels are expensive, difficult to replicate assets, as well as HLX's formidable (proprietary) expertise working with these type of assets in the deep water realm...I believe shareholders should benefit from large and rising margins within this segment for the foreseeable future. i.e. I don't expect serious competition to drive down margins and hence returns for quite awhile (I expect the opposite).

Also previous investments in their E&P properties should bolster margins over the near to medium term. With 3 new fields coming online shortly (consider these fields ability to ramp up to full production relatively quickly as well), it doesn't take a genius to realize significant margin expansion within this segment is likely. Due to the natural operating leverage of the E&P business, this segment should begin to drive profitability considerably higher over the next year or so as new production kicks in (as sales increase while fixed and variable costs decrease, causing margins to expand) and profitability explodes.

Lastly, a longer term mix shift to the faster growing, higher margin services segment (currently 70% of revenues) and ongoing improvements in HLX's cost structure should make future growth meaningfully more profitable than what a careful study of historical results would indicate. For instance, Capex for the E&P segment is much larger than capex for HLX's service's segment. Therefore, as management begins to focus their attention more on the growth of the service segment (over time representing more and more of Helix's revenues), capex will grow at a slower and slower rate.

I believe the market is likely to reward any visable improvement on these fronts, which should begin to manifest themselves in relatively short order. Now that Owen Krantz is back at the helm, I believe execution here is likely, as this is a man who historically has consistently underpromised and overdelivered. Why should I expect the future to be any different.

3. Value added capital allocation (paying down debt, buying back stock, etc.). Management has a variety of non-core assets to divest if the price is right, which if monetized would bolster HLX's cash position and increase their flexibility to add value in this area.

The bottom line...

Considering HLX's historical profitability and future outlook, its savvy and shareholder friendly management team, and the positive underlying business dynamics currently underway...this misunderstood and underfollowed company is grossly mispriced. When examined through a normalized margin and profitability assessment, HLX in my opinion is screamingly cheap. Investors who purchase shares at or around today's price should reap outsized risk-adjusted returns of 50-100% over the next 2-3 years

In a world of limited oil supply, increasing oil demand, and turbulent cutthroat competition in the industry- your best bet is to find a company that has the effect of increasing supply- paid by the big players without directly competing with the big players. Here's one such company- and their financials/growth potential is great.

pending ipo spinoff of cal dive will help clear balance sheet of debt assumed to make recent acquisitions. also, last financials reflected all debt from remington asset purchase but none of earnings from assets. also, company uniquely qualified to maximize return from all added reserves.

Great financials with great EPS gowth rates: 10 yr av = 35%, 5 yr avg = 83% and last 4 qrtrs of over 100%.

Management believes in the company and it's future with ownership of 7% of the outstanding stock. Historically they have beaten analysts expectations with the exception of the last wo quarters of last year. They revised earnings upwards last year and when they didn't hit those numbers the stock was punished by wall street dropping to a low of $28.

Recently the CEO stated 25% growth over the next three years. Current PEG is under .5. The current p/e is right around 10 compared to an industry avg of 19.

Stock is still tremendously undervalued. Applying a growth rate of 25% and a discount rate of 15% and its current low P/E of 10 the net present value of the stock price is almost $90. If the industry avg P/E ratio of 18 is applied, the vaue of the stock is $170.

The biggest risk is the price of oil. I personally do not expect a significant drop in the price of oil given the current conditions in the middle east and in the word and OPEC's control over output.

Another energy play. Beaten down recently and now back on the upswing. Still loving oil and gas, it's not going anywhere for a while folks.

PEG of 0.2 or 0.3,depending on source. Growth estimates of 20% to 25% with a current P/E of 8. Unique method of positioning oil exploration equipment that utilizes GPS and positioning thrusters instead of heavy and cumbersome anchors. Price reflects relatively low energy prices due to low demad during the mild winter. Price should rise along with rising energy prices this spring and summer.

#1 rated pick in cap,Driller energy services. Demand for this company services will increase at least for the next 20 years.I sell my THE stock friday and reinvest my earnings in this company.I decided not to wait till the adquisition deal with Hercules is close.This company potential growth is a good alternative in the energy sector.

High growth stock that has been beaten down by drop in oil and pipeline problems out of their control. Helped by last years aquisition of Remington, the company is expecting earnings growth of 37.5% over the next five years. The absurdly low P/E for a stock with this kind of growth gives it the silly PEG ratio of 0.27.

Trading at 7.3 times this years estimated earnings i believe the stock has limited downside as growth should push this stock higher even if the market remains pessimistic on oil service sector. Despite recent aquisitions being viewed favourably the stock is still down significantly from a year ago.

Recent insider trading have been favourable and the company has roughly 7% insider ownership. The more i read up on this company the more i like the risk/reward it offers. It does by no means feel like a strech that Helix could go back to trading around 40 by the end of the year.

A strong value/growth play here. The company expects to grow 20+% for the next few years and the share price is beaten down. It's good time to jump in.

HLX represents a unique and compelling opportunity at todays prices, representing annualized returns of 30% over the next 3 years. HLX is an aggregation of two complementary businesses: finding/developing Oil & Gas, and contract servicing for oil and gas producers.

Its unique "double-barreled" business strategy should really begin to rev up...as the wisdom of its 2 two-prong approach becomes increasingly clear towards the latter half of '07, and even more so during '08. Potential Catalysts for the stock include...

In the fourth quarter HLX will be receiving delivery of its first marine vessel in which has been upgraded with the ability to lay pipes under water...this will allow HLX to contract this ship at significantly higher prices going forward (promulgating large and rising margins).

Hurricane Katrina set back HLX's production schedule...but also added substantially to its backlog (currently around 1.8B) of future work. Contracting work and rates going forward should be significantly more profitable than they have been over the last few years . The less profitable contracts are unwinding, and new contracts at significantly higher rates should begin to show up in the bottom line over the next few quarters...

Additionally, During the second half of '08, three of its E&P fields (Danny, Noonan, and Pheonix), should roughly double the company's run rate on production...

HLX's E & P unit is focused is on operating in areas in which have been abandoned by big oil, and are considered relics (such as the gulf of mexico). With oil currently around $90 a barrel and natural gas at $7-8 per british thermal units these marginal reserves are looking to be quite profitable, and HLX can aquire them at reasonable prices. The weak dollar has also made the gulf of mexico less attractive to european competitors, thereby improving pricing power.

Essentially HLX now has all of the "tools in the toolbox"...complicated drilling equipment that is difficult and time consuming to replicate...and during periods when rates are declining (or simply at their own leisure), HLX will be able to drill its group of conservative E&P development properties. It is worth mentioning, in an environment like today's, having an in-house service business to compliment its Oil and Gas side is a significant advantage, allowing HLX to monetize its E&P side much faster than would ordinarily be possible. Generally E&P companies face greater costs and longer waiting periods for third party contracts. HLX will not have these problems...

Nonetheless, HLX is currently being penalized for this strategy, and currently trades at a discount to its peers in both industries...starting sometime next year I believe this discount will recede, as it begins to reap investment returns noted from the above, and as investors begin to to appreciate its unique approach.

P/E of 2.7
Revenue Growth of 30% (yoy)
Book Value of $22 per share
Almost 2 Billion in Assets
Almost 2 Billion in Revenue
Great Management
Somehow the market cap for this company is less than the Assets it already Owns. HLX has proven that they already own 667 Billion Cubic feet of Oil. They have ships that are expensive and difficult to Replicate. Nearly 40% of revenues come from laying pipe for other companies. They do have nearly 2 Billion Dollars in debt and although I highly doubt it, if they were to liquify the company, or be bought out, all share holders would be paid an excellent premium for their shares.

Oil extraction and related services will do quite well over next ten years.

HLX represents a unique and compelling opportunity at todays prices, representing annualized returns of 30% over the next 3 years. HLX is an aggregation of two complementary businesses: finding/developing Oil & Gas, and contract servicing for oil and gas producers. Its unique "double-barreled" business strategy should really begin to rev up over the next few years...as the wisdom of its 2 two-prong approach becomes increasingly clear towards the latter half of '07, and even more so during '08 expect outsized returns

Potential Catalysts for the stock include...

In the fourth quarter HLX will be receiving delivery of its first marine vessel in which has been upgraded with the ability to lay pipes under water...this will allow HLX to contract this ship at significantly higher prices going forward (leading to larger, rising margins).

Hurricane Katrina set back HLX's production schedule...but also added substantially to its backlog (currently around 1.8B) of future work. Contracting work and rates going forward should be significantly more profitable than they have been over the last few years . The less profitable contracts are unwinding, and new contracts at significantly higher rates should begin to show up in the bottom line over the next few quarters...

During the second half of '08, three of its E&P fields (Danny, Noonan, and Pheonix), should roughly double the company's run rate on production...

HLX's E & P unit is focused is on operating in areas in which have been abandoned by big oil, and are considered relics (such as the gulf of mexico). With oil currently around $90 a barrel and natural gas at $7-8 per british thermal units these marginal reserves are looking to be quite profitable, and HLX can aquire them at reasonable prices. The weak dollar has also made the gulf of mexico less attractive to european competitors, thereby improving pricing power.

Essentially HLX now has all of the "tools in the toolbox"...complicated drilling equipment that is difficult and time consuming to replicate...and during periods when rates are declining (or simply at their own leisure), HLX will be able to drill its group of conservative E&P development properties.

It is worth mentioning, in an environment like today's, having an in-house service business to compliment its Oil and Gas side is a significant advantage, allowing HLX to monetize its E&P side much faster than would ordinarily be possible. Generally E&P companies face greater costs and longer waiting periods for third party contracts. HLX will not have these problems...

Nonetheless, HLX is currently being penalized for this strategy, and currently trades at a discount to its peers in both industries...starting sometime next year I believe this discount will recede, as it begins to reap investment returns noted from the above, and as investors begin to to appreciate its unique approach.

Potential is there....that just not always enough

I'm still trying to figure out how HLX is staying this low. I guess their debt to book could scare some, or maybe the risk of the oil market. As far as risk goes, HLX seems to be less risky because of their many avenues for profit. If hurricanes hit sure they lose, but not totally because of their contracting business...which by the way is backlogged through 2008 I think.

Helix Energy Solutions (NYSE:HLX - News) reported today that Owen Kratz, the Company’s President and Chief Executive Officer, has purchased approximately 115,900 shares of the Company’s common stock in a series of transactions between March 10 and March 13, 2008. Mr. Kratz acquired the shares for investment purposes and such shares were not acquired and are not held for the purpose of, or with the effect of, changing or influencing the control of the Company. Mr. Kratz will continue to consider his investment in the Company based on various economic factors, and as a result, may purchase or sell shares of the Company’s common stock as permitted by law.

Great stock in a good industry, beaten up lately for no good reason, insider buying shows the firm in undervalued. Will hit $45 soon!

I'm looking for GARPy stocks with global exposure in the energy sector. After lots of looking; Helix fits the bill.