What happened
Shares of Helix Energy Solutions Group (HLX 1.79%), a service provider in the offshore drilling space, dropped as much as 10% on Tuesday, the day after the company reported earnings after the close. By roughly 3:30 p.m. EDT today, the stock was still down by as much as 7.5%. Investors were clearly displeased with what the company disclosed in its quarterly update. That said, there were a number of trends hidden beneath the headline figures.
So what
First-quarter 2021 revenue for Helix came in at roughly $163 million, down about 10% from the same quarter in 2020, when it totaled just over $181 million. The quarterly loss came in at just $0.02 per share, an improvement over the $0.09 per share loss in the first quarter last year. The reduced loss was driven by a material improvement in the company's cost structure, which resulted in its gross profit margin jumping from 1% in the first quarter of 2020 to 9% a year later. So while the top-line weakness wasn't great news, there was actually some good news hidden in the bottom-line loss.
Image source: Getty Images.
In fact, analysts had been expecting the company to lose around $0.07 a share, so Helix beat Wall Street estimates. That usually leads to a stock rally, not a drop. Unfortunately, there were other bits of bad news here to weigh on investors' moods.
For example, the first-quarter 2021 loss was worse sequentially from the fourth quarter of 2020, when Helix posted a profit of $0.03 per share. And notably, management was very clear that the energy industry company is still facing headwinds, with CEO Owen Kratz stating, "We expect 2021 to be another challenging year as our Well Intervention group shifts more to the spot market." So, although Kratz also stated that the company is prepared for an industry upturn, it was pretty apparent that investors shouldn't get their hopes up for a material business improvement just yet. That type of news rarely goes over well with investors.
Now what
There's little doubt that conditions in the energy sector have improved materially since the depths of the 2020 industry downturn. But supply and demand are still not in balance yet, and spending levels remain restrained overall. And yet Helix Energy Solutions stock is up 160% over the past year (though that is down from a peak of more than 300% in early March).
For investors looking at the sector, a tiny name like Helix, with a roughly $700 million market cap, is probably a relatively risky choice. Most would likely be better off sticking to industry leaders that offer a combination of broadly diversified businesses, massive scale, and strong financial foundations, like Chevron.
