Helix Energy Solutions Group, Inc. (HLX) NYSE

Recommendation: BUY

Price (10/3/14): $21.55

Company Overview

Founded in 1960

Headquartered in Houston, Texas

President and CEO: Owen Kratz

Sub-industry: Oil & Gas Services & Equipment

Market Cap: 2.28 Billion

Areas of operation: North Sea, Asia Pacific, Gulf of Mexico, and West Africa

Investment Thesis

Helix is at the turning point of their company strategy to restructure by divesting in subsea construction and paying down a large amount of debt

The core of the business moving forward is increasing, and their capex expenditure is focused on a smaller area of the business improving margins and capacity

Significant cost advantage and mobility give companies an incentive to work with them to maximize rig efficiency

The Deepwater economics suggest an increase in capex in the years to come

Strong commitment from the EU on off-shore wind farming

2 billion dollar back log and a new 4 year deal with options to extend with Petrobras and BP

Four Areas of Business

1. Well intervention

2. Robotics (ROVs)

3. Subsea Construction

4. Production Facilities

Well Intervention

Engineer, manage and conduct well construction, intervention and asset retirement operations in depths from 200 to 10,000 feet

Q4000 – multi-service semi-submersible vessel set a series of well intervention “firsts” in increasingly deeper water without the use a traditional rig

Significant cost and mobility advantage

Increasing demand for subsea tree installations

Deal signed with Petrobras and BP

Q5000 delivered in 2015 and Q7000 in 2016

Robotics (ROV) Marine construction increasingly moving to deeper waters

Fleet: 51 ROV’s, 4 trenching system, and 2 ROV drills

New five year deal inked with McDermott

Offshore alternative energy is increasing in demand (Northern European wind farming) and was 9% of revenue in 2013 with significant upside potential for 2014 and beyond

Subsea Construction

Sold equipment and operations in pipe lay in 2013 and January 2014

Focus on well intervention and robotics

Production Facilities

Own the HP I floating production unit contracted out until at the very least Dec 31, 2016

Own significant interest in Independence Hub platform & Deepwater Gateway

Formerly its own segment Oil and Gas but now is not the focus of the core business for Helix

CGA contract agreement sign 2011 for HFRS containment

Risk and Customers

Risks Oil and Natural Gas prices

Weather

Government Regulation

Damage and Upgrade Cycle

Major Customers Shell

Petrobras

British Petroleum

McDermott

Over 65 customers, none of whom represent more than 10% of revenues

Top-Down

Energy sector as a whole has taken a major hit

Oil prices continue to slide

Deepwater Capex is projected to rise significantly in the next decade

With Capex on the rise companies look to helix to provide well intervention services at a significant cost advantage

Eurozone Regulation attempting to make 35% of its electrical from alternatives, and 12% of that from off-shore wind farming

Deepwater Capex Projections

Key Ratios

P/E: 11.22

Current Ratio: 3.18

Since 2009 Cut there total debt by more than half

Debt/Equity: 0.3

ROE: 12.77%

ROA: 7.52%

Profit Margin: 19.34%

Debt-to-Assets: 40%

Comparables

Key Statistics HLX OII SPM.MI OIS EXH TDW CKH Industry

MKT Cap 2.27B 6.76B 6.92B 3.22B 2.82B 1.90B 1.48B --

P/E 11.22 13.49 11.41 14.03 27.09 7.46 23.04 16.83

PEG(5 yr expected) 1.03 0.73 0.69 -7.44 5.32 1.78 0.63 0.98

P/S 2.27 1.97 0.53 1.17 0.98 1.29 1.14 2.62

P/B 1.41 3.18 1.43 2.5 1.6 0.71 1.02 3.15

Profit Margin 19.34% 11.36% 2.37% 11.07% 3.75% 10.35% 5.47% 6.98%

EPS 1.82 3.68 0.7 5.57 1.58 3.09 3.43 0.85

ROE 12.77% 19.74% 6.88% 14.19% 3.25% 5.80% 5.54% 15.51%

Chart Compared to NYMEX Brent Crude

First Two Quarters of 2014

Net Revenues-- 2014 2013 % Increase 2014 2013 % IncreaseWell Intervention 181,218 99,323 82% 340,918 205,655 66%Robotics 119,704 88,374 35% 207,594 152,570 36%Subsea Construction 37,659 358 65,185Production Facilities 24,049 24,174 -1% 47,189 44,567 6%Intercompany elimination -19,384 -17,352 12% -36,900 -38,370 -4%Total 305,587 232,178 32% 559,159 429,607 30%

Three Months Ended, June 30

Six Months Ended, June 30

Weighed Average Cost of Capital (WACC)Assumptions WACC Sensitivity Analysis

Risk-Free Rate of Return (Rf) 2.5%Expected Market Return (Rm) 6.9%Market Risk Premium (Rm - Rf) 4.4%Size Premium 0.0%Specific Company Risk Premium 2.0%Levered Beta (Industry) 1.00xUnlevered Beta (Industry) 1.30xDebt/Equity (Industry) 53.5%Debt/Equity (Company) 34.5%Re-levered Beta (Company) 1.59xEquity/(Debt+Equity) (Company) 58.9%Debt/(Debt+Equity) (Company) 41.1%Preferred/(Debt+Preferred+Equity) (Company) 0.0%Pre-Tax Cost of Debt (Rd) 4.11%Cost of Preferred (Rp) 0.0%Federal Income Tax Rate 35.0%

WACC Calculation WACC Sensitivity Analysis

Market Risk Premium 4.4%multiplied by: Levered Beta 1.59x

Adjusted Market Risk Premium 7.0%plus: Risk-Free Rate of Return 2.5%plus: Size Premium 0.0%plus: Specific Company Risk Premium 2.0%

Cost of Equity 11.5%multiplied by: E/(D+E) 58.9%

Cost of Equity 6.7%

Pre-Tax Cost of Debt 4.11%multiplied by: (1-Tax Rate) 65.0%

After-Tax Cost of Debt 2.7%multiplied by: D/(D+E) 41.1%

Cost of Debt 1.1%

Cost of Preferred (Rp) 0.0%Multiplied by: P{(D+P+E) 0.0%

Cost of Preferred Portion 0.0%

WACC 7.84%

Discounted Cash Flow AnalysisValuation Date 10/1/2014

FYE: 12/31, Terminal(thousands USD) 2014 2015 2016 2017 2018 2019 2019

Total Revenue $1,051,873 $1,262,248 $1,640,922 $2,133,199 $2,666,499 $3,199,798EBITDA 319,656 383,587 498,663 648,262 810,328 972,394

less: Depreciation and Amortization (118,242) (141,890) (184,458) (239,795) (299,743) (359,692) EBIT 201,414 241,697 314,206 408,468 510,584 612,701

less: Taxes (23.73%) (47,796) (57,355) (74,561) (96,929) (121,162) (145,394) Net Income 153,618 184,342 239,645 311,538 389,423 467,307

plus: Depreciation and Amortization 118,242 141,890 184,458 239,795 299,743 359,692 less: Total Capex (174,951) (209,941) (272,923) (354,800) (443,500) (532,200) less: Increase in Working Capital (14,390) (17,268) (49,228) (63,996) (66,662) (43,773)

Unlevered Free Cash Flow 82,520 99,024 101,952 132,537 179,004 251,026 Weighted Average Cost of Capital 7.84% 7.84% 7.84% 7.84% 7.84% 7.84%Discount Period 0.125 0.750 1.750 2.750 3.750 4.750

Present Value of Free Cash Flows 81,745$ 93,572$ 89,331$ 107,683$ 134,857$ 175,362$ Total Present Value of Free Cash Flows 682,549$

Present Value of Terminal ValueTerminal Unlevered FCF 251,026$ Long-Term Growth Rate 2.0%WACC 7.84%

Terminal Value 4,381,247 Discounted Terminal Value $3,060,651

Present Value of CompanyTotal Present Value of Free Cash Flows 682,549$ Discounted Terminal Value 3,060,651

Present Value 3,743,200$ less: Net Debt 113,000

Present Equity Value 3,630,200$

Estimated Fair Value Per Share 34.46$ Current Share Price 21.55$ Potential Upside 59.89%

Sensitivity AnalysisWACC Value Per Share

6.00% 51.79$ 7.00% 40.79$ 8.00% 33.48$ 9.00% 28.28$

10.00% 24.38$