Morgan Stanley Sees Helix Energy Shares More Than Doubling, Upgrades To Overweight

Morgan Stanley’s Ole Slorer upgraded the rating for Helix Energy Solutions Group Inc HLX from Equal-weight to Overweight, while raising the price target from $8 to $10. He mentioned that well intervention is expected to lead the recovery offshore.

Likely Trough In 1Q16

“Well intervention is characterized by few suppliers and demand driven by (i) regulation around plug and abandonment (P&A) work and (ii) repairing wells to boost production, yielding a very fast payback for customers,” analyst Ole Slorer wrote.

The analyst expects this work to lead the recovery, since deferred maintenance is a necessity irrespective of what the oil prices are. On the other hand, higher oil prices are likely to “drive the incremental offshore dollar to high-return intervention work.”

Other Advantages

Although rigs remain a threat, but Helix Energy’s well intervention continues to be more competitive. In the GoM, even at current depressed dayrates of 60 percent below the peak for DP rigs, the company’s vessels are 15-25 percent more economic for customers. In the North Sea, Helix Energy’s well intervention vessels are 30-60 percent more economic.

Estimates Raised

The 2016 and 2017 EBITDA estimates have been raised from $61mm to $110mm and from $130mm to 165mm, respectively.

“Yet, [Helix Energy] shares are pricing in a much more punitive valuation vs. offshore names that are structurally worse off,” Slorer commented.