What happened

Shares of offshore energy services provider Helix Energy Solutions (HLX -0.56%) fell a little bit less than 11% in early trading on Aug. 12. By 10:30 a.m. EDT, that loss had been pared to a still sizable 8% or so. The news that precipitated the drop was actually spread across two days.

So what

Helix Energy Solutions is muddling through a difficult period in the energy sector, noting that oil prices actually fell below zero at one point earlier in the year. Although there were technical reasons for that, it basically meant that, for a brief moment, oil companies were paying customers to take their oil. Oil prices are still at a relatively low level, though much improved from zero, leading oil companies to pull back aggressively on their capital spending plans. That's hit Helix hard:  Through the first six months of 2020, it lost $0.06 per share, compared with a profit of $0.12 per share in the first half of 2019. That's pretty much to be expected, since Helix's customers aren't spending like they used to.  

An offshore drilling rig

Image source: Getty Images

Looking to support its balance sheet through this rough patch, Helix announced that it was issuing $175 million in convertible notes on Aug. 11. One day later, today, it announced that it was upping that issuance by roughly 15%. The proceeds are going to be used to pay down existing debt that would have come due over the next year or two. Which brings up what is likely the most important issue here: the interest rate. The new convertible is going to cost Helix 6.75%, while the debt it is retiring was costing it 4.25%. That's a material uptick, especially given that market interest rates are at historically low levels. Put simply, investors want more yield today because they aren't as confident about the company's future as they were when the old debt was issued. That's not good news and simply adds to the negative of the higher interest costs that will result from this issuance.  

Now what

Most investors should probably avoid the energy sector today. If you do wish to invest in the space, large, diversified, and financially strong energy companies, like a Chevron, are probably a better bet than a relatively small (roughly $700 million market cap) energy services company like Helix Energy Solutions. Given the increased interest rate needed to get the current convertible bond deal done, and what it says about the market's view of the company, it's not surprising that investors sold off Helix's shares on this news.