Helix Energy Solutions Group Inc (HLX) 2022 Q2 法說會逐字稿

Greetings, and welcome to the second quarter Helix Energy Solutions 2022 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded Tuesday, July 26, 2022.

I would now like to turn the conference over to Brent Arriaga, Chief Accounting Officer. Please go ahead, sir. .

Good morning, everyone, and thank you for joining us today on our conference call for our second quarter 2022 earnings release. Participating on this call for Helix today are Owen Kratz, our CEO; Scotty Sparks, our COO; Erik Staffeldt, our CFO; Ken Neikirk, our General Counsel; and myself.

Hopefully, you've had an opportunity to review our press release and the related slide presentation we released last night. If you do not have a copy of these materials, both can be accessed through the For the Investors page on our website at www.helixesg.com.

The press release can be accessed under the Press Releases tab and the slide presentation can be accessed by clicking on today's webcast icon. Before we begin our prepared remarks, Ken Neikirk will make a statement regarding forward-looking information. Ken?

During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations and assumptions as of today. Such forward-looking statements may include projections and estimates of future events, business or industry trends or business or financial results. All statements in this conference call or in the associated presentation, other than the statements of historical fact, are forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Act of 1995.

Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of risks, uncertainties, assumptions and factors, including those set forth in Slide 2 and our most recently filed annual report on Form 10-K, our quarterly reports on Form 10-Q and in our other filings with the SEC.

You should not place undue reliance on forward-looking statements, and we do not undertake any duty to update any forward-looking statement. We disclaim any written or oral statements made by any third party regarding the subject matter of this conference call. Also during this call, certain non-GAAP financial disclosures may be made.

In accordance with SEC rules, the final slide of our presentation provides reconciliations of certain non-GAAP measures to comparable GAAP financial measures. These reconciliations along with this presentation, the earnings press release, our annual report and a replay of this broadcast are available under the For the Investors section of our website at www.helixesg.com.

Information on this conference call speaks only as of today, July 26, 2022, and therefore, you are advised that any time-sensitive information may no longer be accurate as of any replay of this call. Owen?

Good morning. We hope everyone out there and their families are doing well and staying safe and healthy. This morning, we'll review our Q2 and year-to-date results, performance and operations. We'll provide -- excuse me, we'll provide -- well, losing my voice, I'm sorry.

We'll provide our outlook for the balance of 2022 and provide color on the rapidly improving market and its potential impact on '23 and beyond.

But before we get into Q2 results, I want to start by commenting on our recent acquisition news. During the quarter, we announced we were acquiring the Alliance Group of companies. And on July 1, the first day of the third quarter, we closed on that transaction. Financially, we have been keeping our powder dry, so to speak, keeping cash on hand to be confident in being able to cash settle our long-term debts.

On today's call, you'll hear a lot about the market improvements we're seeing and the opportunities we feel are out there. We decided to deploy some of that capital by buying Alliance at a time when we're anticipating real growth in the abandonment market. We wanted to position Helix as a full field abandonment service provider, and this acquisition expands our offerings and market diversifies our revenue stream and further positions Helix to benefit from the improving environment.

We'll get into more detail later in the call, but it's an understatement to say that we're very excited about the prospects, the Alliance acquisition offers, and we welcome Alliance into the Helix family.

Moving now to the presentation, Slides 5 through 7 provide a high-level summary of our results. During the second quarter, we benefited from increased activity and improving rates across our fleet, driven by a strengthening global offshore energy market. Highlights for the quarter include Robotics delivered strong results for the second quarter with added benefits provided by the addition of the Shelia Bordelon, the Horizon Enabler and increased ROV utilization.

The Q5000 had strong operational performance with minimal downtime in the Gulf of Mexico. The Seawell and the Enhancer have been deployed on projects since early May. We completed regulatory maintenance on the Q4000, Seawell and the Q7000, and production facilities continues to be a steady performer and benefited from the production of our Droshky field.

Revenues for the quarter were $163 million, an increase of $13 million over our first quarter results. The increased revenues flowed to the bottom line with a net loss of $30 million also a $12 million improvement over Q1. Adjusted EBITDA for the quarter was $17 million. The first half of 2022 was as challenging as we expected. We performed regulatory maintenance on 6 of our vessels in the North Sea well intervention market.

And -- I'm sorry. The North Sea well intervention market was slow to start. We had a significant amount of uncertainty and limited visibility for the Q7000 and submarket rates for SH1 and SH2. As we enter the third quarter, many of these uncertainties and challenges are behind us, with scheduled maintenance periods on our vessels are predominantly complete. The North Sea Well Intervention season started in early May. The Q7000 is mobilizing for additional work in Nigeria, and our schedule is firming up.

Above all, the offshore market is recovering. The improvements in utilization and rates that have been driving the Gulf of Mexico early in the year are now visible in all regions. On to Slide 8. From a balance sheet perspective, our cash balance at the end of the quarter was $261 million. During the quarter, our operating cash flow was negative $6 million, including $9 million of dry dock and recertification costs.

We spent $2 million on CapEx, resulting in a negative free cash flow of $7 million. At quarter end, we were in a net debt position of $4 million. As mentioned earlier, during the quarter, we announced our planned acquisition of the Alliance companies. On July 1, we finalized the acquisition using approximately $120 million of cash on hand.

I'll now turn the call over to Scotty for an in-depth discussion of our operating results.

Thanks, Owen, and good morning, everyone. Moving on to Slide 10. Both onshore and offshore, our teams are doing a fantastic job keeping our operations functional and safe. We completed the remaining planned regulatory maintenance and inspection programs that impacted utilization in the first half of the year.

As expected, our second quarter results improved over Q1. Market conditions are improving, and we are looking forward to a much better second half of the year with expectations of high utilization across the fleet, increasing rates and more favorable terms and conditions.

In the second quarter of 2022, we continue to operate 13 vessels globally with minimal operational disruption, continue to operate at high standards with 98.1% uptime efficiency for the quarter. During the second quarter, we produced revenues of $163 million, resulting in a gross profit margin of negative 1%, generating a loss of $30 million, producing positive EBITDA for the quarter of $17 million.

In the second quarter, the Well Intervention fleet achieved utilization of 67% globally, primarily due to the planned maintenance periods with 80% utilization in the Gulf of Mexico, 88% in Brazil, 44% utilization in the North Sea and West Africa, with the North Sea commencing the season. Operations in West Africa completed early in the quarter allowing for the planned regulatory maintenance period.

Robotics chartered vessel fleets achieved high utilization of 94% in the quarter, operating 5 vessels, working 370 vessel days between ROV support, trenching and renewable works globally.

Slide 11 provides a more detailed view of our Well intervention business in the Gulf of Mexico. The Q5000 had strong utilization increasing to 95% in the second quarter compared to 72% in Q1. Performing production enhancement work on 6 wells for 3 customers utilizing the jointly owned Helix-Schlumberger 15K intervention system in ultra-deepwater. The Q4000 had lower utilization of 66%. The vessel continued a multi-well campaign for 1 client in ultra-deepwater, prime to commencing the regulatory maintenance period. The vessel then commenced the 2 well abandonment scope for another client.

Pleasingly, both vessels have high utilization with contracting and awarded work for the second half of 2022 and good visibility of potential further activity with steadily increasing rates now contracted at rates 40% to 50% higher than last year's rates. The key vessels have integrated Helix under a subsea service Alliance teams and equipment continuously installed, working under [1 contract] offering our clients numerous benefits with increased operation and safety efficiency.

Moving to Slide 12. Our North Sea Well Intervention season has commenced with both vessels activated and operational. The North Sea market is finally improving, and our business has seen much improved utilization and achieving higher rates with both vessels contracted for the most of the second half of 2022. We are already taking sizable awards for 2023 works and good visibility of further works with increasing rates. And at this time, we're expecting a much earlier start to the season in 2023.

The Well Enhancer achieved 63% utilization in Q2. The vessel has been warm-stacked in Leith, Scotland, significantly reducing the vessel operating costs and crew levels. The vessel then performed a 1-well production enhancement scope for 1 customer, followed by an abandonment scope conducting its first ever works West of Shetland.

The Seawell had 66% utilization in the quarter after completing its regulatory dry dock maintenance and inspection in late April. The vessel then went back into warm-stacked mode until early May. The vessel then performed production enhancement scopes on 4 wells with 2 customers, followed by P&A scope on 1 well for another customer.

The Q7000 completed work in Nigeria early in April, and then completed transit to Namibia and has now completed its regulatory maintenance and inspection program. The vessel had an idle period, and we had a significant degree of uncertainty regarding her schedule. But for now, she has completed transit back to Nigeria to conduct work on 1 well with options for further 3 wells for an existing client.

On completion of the works in Nigeria, the vessel is scheduled to commence the paid transit to the APAC region to undertake a dry docking preparation for our contracted work in New Zealand to be performed in the early part of 2023.

Following the work in New Zealand, the vessel is scheduled then to transit to Australia to undertake work in the second half of 2023 under now fully executed contract conducting a 7-well abandonment campaign for Cooper Energy. Vessel is then planned to conduct contracted abandonment works on 2 wells for another client. There's now good visibility for work for the Q7000 with further work extended in Australia, West Africa, Brazil in 2023 and onwards.

Moving to Slide 13. In Brazil, the Siem Helix 2 had a strong quarter with 99% utilization, completed production enhancement work on 3 wells and abandonment on 1-well during the quarter. The vessel is contracted to Petrobras until mid-December, and we are in advanced discussions on a possible extension with Petrobras at a substantial rate increase, which likely would commence December of 2022.

The Siem Helix 1 was 77% utilized and short-term FPSO and accommodation support projects in Ghana that completed in May. The vessel then transferred back to Brazil to undertake awarded ROV survey work. Prior to commencing the long-term decommissioning projects in Q4 under recently awarded trading contract. The contract runs for initial 2 years with additional options to extend. We expect 2023 is going to be a far better year for us in Brazil, with both vessels being back to well intervention rates and it's pleasing to see good demand for the units at better rates and conditions.

Forward looking, there is more diversified markets in Brazil, with more operators discussing potential works as they take further field ownership as part of Petrobras' ongoing divestment program.

Moving to Slide 14 for our Robotics review. Robotics had another good quarter and is having a good year, and the business continues to see an improving market for all services we provide. Operating 5 vessels during the quarter, primarily working between trenching, ROV support, decommissioning and non-oil and gas and renewables related projects.

In the APAC region, Grand Canyon II had 100% utilization in Q2. The vessel completed work in Thailand, undertaken a wellhead decommissioning project and then commenced the renewables ROV support project in Taiwan, expected to last well into Q3 with several options to extend.

In the North Sea, the Grand Canyon III, which utilized 89%, undertaking renewables, trenching operations with 2 clients, performing extremely well on our [lump sum] trenching contract. The vessel has contracted oil and gas and renewables trenching scopes, which are anticipated to keep the vessel busy for most of 2022. The project chartered vessel at (inaudible) had 100% utilization, continuing site clearance and survey works that were completed in July.

Also in the North Sea the Horizon Enabler completed 25 days on an ROV support project and has been mobilized with the T1200 trenching system and commenced work offshore Egypt on an oil and gas trenching project. The vessel has contracted trenching works on oil and gas and renewables projects into Q4.

In the U.S.A., the Shelia Bordelon, a Jones Act-compliant vessel was utilized 90% in Q2, undertaken ROV support work for 4 customers in the Gulf of Mexico. The vessel has been contracted on a renewables support project on the U.S. East Coast expected to last into late Q3 and recently has been awarded further works on the U.S. East Coast.

Overall, the market for services we provide in renewables is expanding at a decent pace in size and geography and in duration. The Robotics business has tendered over 3,000 trenching vessel days between 2023 and 2028 and we believe we are well positioned to secure a good portion of these works. The renewables market globally is actively contracting a large portion of global marine contract and services and for Helix Robotics, that is leading to a tightened market for vessels, ROVs, trenches and personnel, leading to increasingly high demand for our services.

Over to Slide 15. I'll leave this slide detailing the vessels, ROV and trenching utilization for your reference. The first half of the year that we expected would be low than usual (inaudible) and the second half of the year, we feel is really shaping up nicely. We expect strong utilization for all vessels and services in the second half of the year, leading into a significant improvement in 2023.

Based on all of this, the market is improving across all business lines, stronger utilization, increasing rates and in certain areas of the business, rates are improving better and quicker than we expected, along with better terms and conditions. We are securing longer-term contracts and looking to secure works for some of the Well Intervention assets into 2025. The years ahead of us look far better than the most recent period we have endured.

I would again like to thank our Helix global team and partners, offshore and onshore, you provided a much improved quarter compared to Q1 with minimal NPT while keeping our very high standards in safety performance. And you have secured a good backlog for the second half of the year and beyond, clearly looking forward to a more exciting times are ahead.

I'll now turn the call over to Brent.

Thanks, Scotty. Moving to Slide 17. It outlines our debt instruments and their maturity profile as of June 30. Our total funded debt was $275 million at the end of the second quarter with the final $35 million payment on our 2022 convertible senior notes during Q2. The maturity during the remainder of the year is the semi-annual MARAD payment.

Moving on to Slide 18. This slide provides an update on key balance sheet metrics, including long-term debt, liquidity and net debt levels at quarter end. With cash and restricted cash of $263 million, our net debt position was $4 million. At quarter end, we had no amounts outstanding and $60 million of availability under our ABL with resulting liquidity of $321 million. On July 1, we used approximately $120 million of cash on hand for our acquisition of Alliance.

To coincide with the Alliance acquisition, on July 1, we also amended our ABL, increasing the size of the facility to $100 million, a $20 million increase. I will now turn the call over to Erik for a discussion on our outlook for 2022 and beyond. Erik?

Thanks, Brent. Our results for the second quarter and year-to-date bear witness to the challenges and headwinds we have faced in 2022. We believe the first quarter signified the bottom market for Helix with the expected improvement thereafter. In the second quarter, we continued maintenance on 3 of our intervention vessels, Seawell, Q4000 and Q7000. In all, regulatory maintenance was performed on 6 vessels during the first half of the year. With that behind us and rapidly improving market, we expect the second half to be significantly stronger than the first half.

In Well Intervention, the North Sea market is quickly becoming a healthy market with operators contracting vessel days for '22 and already planning work for '23 and beyond. The Gulf of Mexico market continues to benefit from strong utilization and increasing rates. The market in Brazil is strong with international operators increasing activity.

In West Africa, we secured additional work for Q7000 prior to its expected departure to the APAC region. In Robotics, we continue to benefit from stronger renewables markets with added benefit from expansion of the market into the U.S. East Coast. ROV utilization and rates are improving. Although we will continue to deal with the headwinds from our operations in Brazil through 2022, much of the uncertainty associated with our outlook for 2022 is behind us. We are now in a position to provide our outlook for the full year 2022.

Our outlook is a good faith attempt to provide investors information that balances the challenges faced during the first 6 months against the backdrop of an improving market for the remainder of the year and beyond. We have included an outlook for Alliance, the shallow water offshore energy services companies we acquired on July 1.

We are setting our annual guidance for '22 as follows: Revenue in the $725 million to $825 million; EBITDA, $85 million to $110 million; free cash flow generation in the negative $20 million to positive $15 million. These ranges include some key assumptions and estimates. Any significant variation from these key assumptions and estimates could cause our results to fall outside the ranges provided.

Providing our key assumptions by segment of regions starting on Slide 21, our Well Intervention segment. In the Gulf of Mexico, this continues to be our strongest market with improving rates and expected strong utilization on the Q4000 and Q5000. Contracted work extends into Q4, we expect strong utilization in this region except for a 15-plus day scheduled gap on the Q4000 as it awaited equipment mobilization. In the U.K. North Sea, both vessels commenced their season in early May. Both vessels have contracted work into Q4 with strong utilization expected into Q4.

The Well Enhancer did have 14 days of downtime in July for a SIL umbilical replacement. In West Africa, the Q7000 completed its maintenance in Q2 and transited back to Nigeria in July. We have a contract for a 1-well program with options up to 4 wells. The vessel is then planned to transit to the APAC region to commence the Tui field abandonment towards the end of '22 or early '23.

In Brazil, the Siem Helix 2 was contracted into mid-December with Petrobras. The Siem Helix 1 is performing ROV survey work in Brazil into the fourth quarter prior to its contracted 2-year well abandonment work for Trident in late Q4.

Moving to our Robotics on Slide 22, Grand Canyon II in APAC is on contract into Q3 and is expected to have good utilization for the balance of '22 in that region. The Grand Canyon III is contracted to perform trenching in the North Sea for multiple customers with expected strong utilization for the balance of the year.

In the North Sea, we continue to incrementally benefit from renewable site clearance work expected to continue into Q3. The Horizon Enabler commenced the trenching project offshore Egypt, [high] utilization into Q4. The Shelia Bordelon is working off the U.S. East Coast on contracted wind farm work with expected good utilization through Q3 and good follow-on opportunities thereafter.

Moving to production facilities, the HP1 is on contract for the balance of '22 with no expected changes. We have expected variability with production as the Droshky field continues to deplete and we continued to pursue similar opportunities which could impact our results.

Continuing on Slide 23, we're excited to include Alliance into the Helix family. The acquisition complements our existing offerings and significantly enhances our position as a full-field abandonment service provider. Alliance provides marine services with a diversified fleet of lift boats, offshore supply boats and crew boats, energy services comprised of plug-in abandonment and intervention services in coastal areas and offshore for surface infrastructure with 24 P&A spreads, 9 coiled tubing [projects], diving, heavy lifting from 3 diving support vessels and from the EPIC Hedron derrick barge.

There is some seasonality to the business, particularly with the diving and heavy lift service, which we expect to slow down during the first and fourth quarters of the year. The outlook for Alliance for second half of '22 includes the following assumptions. We expect to have strong utilization from the lift boats and expect the OSVs and crew boats to have variability in utilization.

Energy Services, we expect strong utilization on 8 to 12 spreads and 1 to 3 coiled tubings. Diving and heavy lift should have good utilization in Q3 prior to their seasonal slowdown.

Moving on to Slide 24. Our CapEx forecast for '22 is heavily impacted by the amount from '21 pushed into '22 of approximately $20 million. With heavy regulatory year and (inaudible) clients, our CapEx range for '22 is currently $50 million to $60 million. The majority of our CapEx forecast continues to be maintenance and project related, which primarily falls into our operating cash flows. Reviewing our balance sheet, funded debt of $275 million is expected to decrease by $4 million over the remainder of '22 as a result of scheduled principal payments.

I'll skip the remaining slides and leave them for your reference. At this time, I'll turn the call back to Owen for a discussion on our outlook beyond '22 and for closing comments.

Thanks, Erik. There -- of the uncertainties and variables that previously caused us to refrain from providing guess or guidance for the full year '22 have been resolved to a point we can give guidance for the second half of '22 in the range of $51 million to $66 million. For our pre-Alliance business, $70 million to $85 million for the full year. This second half run rate exceeds the full year run rate of 2021.

The Alliance acquisition that closed at the beginning of July is expected to add an additional $15 million to $25 million for the second half of '22. Not only are the uncertainties of 2022 becoming clearer, we also have perhaps the best visibility in recent years at this point for what may happen next year in 2023. We expected that 2022 would be a tough year, and the market and demand would improve for '23.

Ahead of this, we made 2022 what we have previously called a transition year. There are certain events in '22 that negatively impacted results that should not repeat and positive events that we're fairly confident in. To the point, we feel we should share them with you at this early stage ahead of next year. Let me be clear that we feel 2023 is expected to be a substantially better year than 2022.

We've not engaged in our budgeting process, so this is not our formal guidance for '23, but merely directional indicators. It is appropriate that we share our estimates on these areas with the understanding that it's only our best estimate of what we might expect at this point in time.

Event #1 is the Q7000. Until April, the vessel has been working nonstop in Nigeria for 15 months straight. Due to the logistical specifics of working in Nigeria, it was not possible to perform the regulatory required maintenance normally done while working. The vessel was operating quite well, but the regulatory bodies required us to remove the vessel from operations in order to conduct the regulatory required maintenance and overhaul typically done while operating.

This nonrevenue-generating period began at the beginning of April, and the vessel is expected to return to generating revenue next week. This is roughly 115 days of lost opportunity that's not expected to repeat in 2023. The cost of this period has been taken against the '22 P&L. There remains work to be completed in West Africa, but after that, we're planning to relocate the vessel to Australia and New Zealand for a campaign of intervention work.

This transit is expected to take approximately 95 days with the dry dock along the way in compliance with regulatory requirements for working in Australia. The vessel is expected to be ready to work in that region around the beginning of the year, pending completion of the work in West Africa. We're required to defer the cost and revenue for this transit period and amortized over the project in 2023. The Q7000 is not expected to add any contribution to 2022 EBITDA during this period.

The Q7000 currently has a campaign of 3 contracts in 2023 with visibility for further contracts to be added. As a result of these onetime events in 2022 that are not expected to repeat, and the visibility on 2023 contracts in hand plus visibility of further work, our current expectations for the EBITDA contribution from the Q7000 are to go from a range of $3 million to $7 million in '22 to a range of $20 million to $30 million for '23 or a year-over-year positive swing of at least $13 million.

The second event I'll cover involves the SH1 and the SH2. For both 2022, these vessels were beyond the initial 4-year term of their contracts with Petrobras. Petrobras extended the SH2 contract by 1 year, but at rates that guarantee the cash loss to Helix. Petrobras did not extend the contract on the SH1. Helix stopped [after] work and ROV support work for the SH1 during '22 to keep the vessel active while pursuing meaningful options for '23.

The EBITDA contribution for these 2 vessels for full year 2022 is currently expected to be approximately a negative $35 million. The SH1 is now contracted for 2 years on intervention work in Brazil at profitable rates with that work scheduled to start either late '22 or early '23. Helix is exploring several options for the SH2, including a multiyear extension with Petrobras at profitable rates, as Scotty mentioned.

Based on current expectations, Helix believes that these 2 vessels could provide $20 million to $30 million of EBITDA contribution in 2023 and potentially increasing beyond '23 in the event of contracted rate improvement. That would represent a positive $55 million to $60 million of EBITDA improvement in 2023 over 2022.

A third topic is intervention rates, a discussion on rates is not a simple one, but in general, they're increasing dramatically and rapidly rates vary greatly depending on region, client, competition, scope of work and duration of the contract. In general, though, over the last 6 months, rates are up from as little as 15% in some cases to others that were up over 70%.

On average, rates could be considered to be up 30% to 45% over just the past 6 months and continue to increase. We are tendering at these higher rates and are being awarded work well into 2023 and in some cases, beyond.

We're somewhat reluctant in offering rates beyond '24 as costs are also increasing, but generally not at the same pace as rates. Our current assumptions are that costs will increase by 5% a year on average. This increase in rates is progressing rapidly, and the second half of 2022 is expected to be a mix of old and new rates with a greater extent of impact likely occurring in 2023 and beyond.

A fourth topic is utilization. Utilization is a larger driver of our profitability than rates. As such, our team is typically very good at achieving utilization. Available days to market is impacted by regulatory dry dock and maintenance requirements. The year 2022 was unusual in that we decided to perform the dry dock and maintenance on 7 of our vessels.

I've already mentioned the roughly 200-plus days of unavailability for the Q7000 during '22. Additionally, looking solely at the other 6 vessels, there should be over 200 days of additional days for these 6 vessels that would reduce available marketed days in 2022. That should not occur in '23. There's still a significant dry dock and regulatory inspection plan for the Q4000 and Q5000 in '23, respectively, which could require as much as 100 days of unavailable marketed days.

Altogether, though, this means that we should have over 300 days of additional vessel availability in 2023 compared to '22, for which vessels will be available to the market. This would coincide well with the demand visibility we anticipate for 2023.

Topic 5 is Helix Alliance. Due to the uncertain nature of the market and hazy visibility, Helix has been retaining cash on the balance sheet to have a greater degree of confidence in being able to cash settle our convertible debt at maturity, and we finished redeeming 1 series of our notes in May.

Given the improving visibility on market and in response to what we believe is a significant opportunity, we felt comfortable at this time to put $120 million of our cash to work with the acquisition of Alliance. Due to regulatory and commercial pressures, there's a significant push underway to abandon and remove many of the Gulf of Mexico oil and gas fields that are built up over time.

We believe this demand will be sustained over the years ahead. Our initial estimates for Alliance for full year was $30 million to $40 million of annual EBITDA. Based on the second half of 2022, expectations as a continuing run rate, we feel we can now raise the upper range of expected EBITDA. 2023 expectations could be in the $30 million to $50 million range for '23.

Topic 6 is Robotics. Demand increased in all of our areas of our business model. Helix is a meaningful player in the provision of world-class ROVs and a global leader in robotic jet trenching. These are vital services to the offshore wind market. In addition, our Robotics division provides site clearance for the wind farms required prior to installation. We are seeing an increase in demand as well as rate increases outpacing cost escalation as Scotty covered.

This has resulted in our robotics gross profit margin increasing from 3% for the year-to-date ending July 30, '21, to 17% for the year-to-date ending July 30, '22, and 23% in the last quarter. We're seeing an increase in demand for all of our Robotics offerings and especially trenching, which generates our greatest margins.

The seventh topic is production facility. The HP1 continues on contract with Talos with current expectations for further extensions. The reserves on Droshky are declining and at some point will end. However, we do anticipate closing on additional similar transactions.

The last topic I'll cover is M&A. The current landscape presents a fairly rich environment for opportunities to consolidate or add to the Helix business model as an energy transition story.

We are mindful of maintaining a strong balance sheet and the alternative uses for cash, such as returning value to shareholders. Our intent to explore and analyze in order to achieve the greatest value to shareholders as well as progress our commitment to being a meaningful contributor to the energy transition process. We've called 2022 a transition year for Helix. We fully intend to transition from a weak market in '22 to a high demand market in '23 and beyond.

We will also transition from being defined as simply an oilfield service company to being more clearly defined in what we do in support of energy transition and sustainability. Helix will focus on late-life oil and gas activities and support of offshore wind. Number one, we will work to maximize the remaining reserves; two, we will be expanding our ability to be a player in the abandonment of oil and gas offshore fields; and three, we'll provide key specialty support services to the offshore wind market.

Earlier this year, we faced many uncertainties. I hope this color makes up for the lack of information going into '22. The market and Helix are evolving rapidly, and there are surely variables that will become more clear over time. But this is a glimpse into what our current expectations may include. We'll endeavor to provide transparency on our best estimates as we approach and proceed with the budgeting process for '23 in this dynamic developing market.

Again, to be clear, we expect 2023 to be substantially better than 2022. We've shared our views and recognize these are forward-looking statements and subject to change. But you deserve to know what our current expectations are and how we're feeling at this time about the company, the market and our prospects. Erik?

Thanks, Owen. Operator, at this time, we'll take any questions.

(Operator Instructions)

First question comes from the line of James Schumm with Cowen.

What gives you confidence in the outlook for Brazil? I know you touched on it. But clearly, you have an anchor contract with Trident next year, but the SH2 contract with Petrobras expires in December. You mentioned advanced discussions with Petrobras, but they tend to be really tough on services companies as I think you guys know well. So what gives you confidence there?

I'll take that. Like you say, we have the anchor contract with Trident that's a 2-year anchor contract with options to extend. And then we are in very advanced healthy negotiations with Petrobras. We're pretty much agreed on rates, and they're far more substantial compared to the 2021 rates and 2022 rates we've had. We're expecting approximately a 40% increase on the rates and the duration of that contract to be about 2 years.

Like I said, we're in advanced discussions. The discussions are very healthy. And I'd like to think that we'll be shortly having that contract in place. Other options of other operators are showing significant interest in the vessel in Brazil also. So that's helping us around discussions with Petrobras.

Great, makes sense. Okay. And then can you maybe just provide an update on the U.K. North Sea well intervention market? I mean it appears that we went from weak to strong almost overnight. Obviously, there's seasonality at play. But how sustainable is this? And just any other color there would be great. .

I'll take a shot and then let Scotty follow up with probably more detail. But in general, the -- a year ago, the only market the North Sea was really talking about was the abandonment decommissioning market. That was in the early stages of planning the first phases would have been P&A followed by subsea and facilities at a later date. So we were really thinking that the North Sea would ramp up in middle to '23 and beyond.

Then Ukraine happened. And all of a sudden, their sustainable energy source became important. And finding more reserves, our work almost overnight shifted from planning of abandonment to production enhancement.

I think I'll just leave it at that and...

Yes. We've got very good contracts in 2022 for the second half of the year with very high utilization for both vessels in the North Sea. We've already taken awards for 2023. And usually, we don't get awards in sort of the third or fourth quarter for the following year. And I'd say for at least the last 3 or 4 years, we have the best visibility and ongoing discussions with our clients for the work they have for 2023 and beyond.

And do you -- I mean, do you guys -- so that makes a lot of sense. But do you guys feel like this was a wake-up call and it's longer term in nature? Or is this just a Ukraine issue and perhaps this gets resolved over the next year? And then there's a huge focus on renewables and the demand for your services just kind of wanes again. Like how structural is this improvement?

I think that's certainly possible. I think the U.K. North Sea market is very politically influenced. So that could happen, but we did have a pretty big backlog of P&A work that was building up, that isn't stopping, but it could be a little delayed. So by '24, I think you're -- even if the production enhancement were to reverse itself yet again and switch back to a focus on renewables and decommissioning, I think there's the backlog of work that's built up that would sustain our utilization levels.

Our next question comes from the line of Don Crist with Johnson Rice.

I wanted to touch on the shallow water Gulf of Mexico Alliance. Now that you've closed the deal, can you give us a little bit more insight into the customer base? Is it widespread? Or is it kind of focused on a couple individual customers there?

And number two, what does the demand look like? Obviously, you're going to have some seasonal slowdown in late Q4, which is normal for the Gulf of Mexico. But what does demand look like going into '23 and beyond there? I know it's a large market.

Yes. I'll take that in reverse order. Some analysts have predicted that the Gulf of Mexico shelf market is as much as $7 billion over the next 10 years. So that would equate to a $700 million a year market. The activity -- I've always been very skeptical of P&A, the hockey stick just never seems to happen. But I think what's going on in the Gulf of Mexico was precipitated by the Fieldwood bankruptcy.

Fieldwood and Cox are the 2 major players along with Arena in the shelf. When Fieldwood went bankrupt under the proceedings, most of their shelf properties reverted back to the legacy owners. So as opposed to being a concentration of properties with 1 client, it's now been disbursed back to the legacy owners, which includes Shell, Eni, BHP, Chevron, Exxon, all of the majors that divested shelf properties now have been back.

The big impetus from both the government and the legacy owners is to get this abandonment done as quickly and expeditiously as possible. I think the only impediment to that is over the past years, the Gulf of Mexico shelf contracting community has sort of been decimated as there's really not a lot of capacity left on the Gulf of Mexico shelf, and therein, we saw the opportunity.

I think Steve Williams, the owner of Alliance, had the foresight to start accumulating assets ahead of this. And if you look there, the 1 contractor that has a full suite of assets and services to do full-field abandonment one-stop shop. If you'd look at their individual asset classes, they own anywhere from, in some cases, up to 33% of all of that class of assets available in the Gulf of Mexico.

So they're almost [ushered] in my mind through their integrated offering and the sheer volume of their assets to capture a large share of that market annually. Layer in over the top of this, the fact that the work is now going to revert back to majors, who expect a little bit different operating process and systems than what Gulf of Mexico contractors have evolved to or devolved to over the last 5 to 10 years. And therefore, it represents a really good opportunity for Helix to bring the systems in with the Alliance capabilities and provide a best-in-class service on a full integrated basis.

And I think that gives us -- it's a market that we were in historically. It's one we understand, and I think we're well positioned to be the best-in-class alternative in that market going forward.

Yes. I appreciate all that color. And if I could ask just one more macro question, kind of following on the previous guy who was asking questions. Fleet status reports from some of the drillers have shown uplift of 20% to 40% in rates. I know your rates are impacted by the offshore driller rates. Are you seeing similar uplift in rates across the industry, not necessarily just in the Gulf of Mexico or Brazil, but just across the industry in general? And how correlated are your rates generally to the offshore drillers?

I'll take that. We are seeing an increase across the board for all services from Robotics and into Well Intervention. Rates have really jumped up from the bottom, we're nearly 100% higher than where we were in the dead of the market in the Gulf of Mexico. But compared to last year's, rates were up 40% or 50% in the Gulf of Mexico and increasing and seeing high visibility on contract in those rates.

In Brazil, we've already discussed Brazil. We're seeing about a 40% increase on the Petrobras contract. And rates are steadily creeping up in the North Sea. It's -- you have to understand it's a slightly different market in the North Sea. We're not a rig, we're 2 smaller diver-based well intervention assets. So our cost base is far less than what we have in the Gulf of Mexico and Brazil and what drillers have in the North sea. So we have a much lower cost base the way I've seen an increase in rates.

Right. Okay. And do you see anything that could be an impediment to increase utilization over, say, the next 12 to 18 months?

The only thing we have coming up is, like Owen said, we do have a dry dock plan for the Q4000 and a regulatory maintenance plans for the Q5000. But with that, I think it's going to be very healthy over the next 12 to 18 months, rates will be higher and the utilization will be high.

Next question from the line of David Smith, Pickering Energy Partners. .

Congratulations on the improved outlook. I was hoping to revisit the beyond '22 section of the outlook. I mean it seems pretty straightforward. I just want to make sure I'm understanding correctly. For the 3 items you quantified, the Brazil vessels Q7, the Alliance acquisition in aggregate at the midpoint should generate around $100 million better EBITDA in '23 versus '22. That's before the impact of better expected utilization and rates for the other Well Invention vessels and for Robotics. And this is before any potential additional Droshky like deals.

So at the midpoint, if I'm reading this right, it looks like you're pointing to '23 EBITDA that is around $200 million or better. So I just wanted to make sure that was the intent? And whether I'm missing anything that might be an offset?

I think that's certainly a possibility. We'll stop short of giving full guidance for 2023 because, as you mentioned, there's a lot of unknowns still be considered there. I don't know that I'm ready to put a hard number on it. There are a lot of things to consider in our budgeting process. We're letting -- we're giving you insight into portions of the budgeting process that we have firm visibility on and have a degree of confidence in sharing.

But like you said, we don't know where rates will eventually wind up. So that could be a big upside or it could be a small upside. I mentioned 300 days of utilization -- additional utilization. How much of that will actually be able to market is an uncertainty. And of course, any days not marketed becomes a drag on EBITDA. So we have to sort of figure out what the balance is there. You have other things to consider.

Are we in a recession, are we going into a recession and what's going to be the impact on demand at that point, what's the reaction of the clients, Ukraine and China, what is that impact on supply and demand going to be, and are we going to see any potential for unforeseen reactions by the clients such as shutting off spending and canceling our contracts? I mean, I'm sort of getting into (inaudible) in the world of always expecting the worst and planning for it.

But these are the things the -- like you mentioned in the North Sea, is there going to be a balance between the environmentalists pushing decommissioning versus sustainable energy levels? Where is that balance going to fall out? We've got the HP1 renewal coming up next year. We do expect it to be renewed, but it is producing on a declining field. So what are the terms and rates of that renewal going to be?

You mentioned the production deals. Production deals are most favorable for us in a high commodity price environment that has an outlook of declining combined with high expected abandonment costs. Right now, we have high commodity prices, and we have rising abandonment cost expectations. So we're certainly heading towards the horizon of an interesting market in that respect.

So there's a lot left for us to mull through and quantify in our minds before we're ready to give 2023 full guidance. But this -- as I believe we said in the presentation, this is directional, and it's significantly to the upside.

Yes, David, I think we wanted to present to the investor base. And I specifically addressed the headwinds that we entered '22 with. And I think a big picture, we had 3 areas of uncertainty, the North Sea, the Q7000 and the impact of sort of the Brazil operations. And so as the year has progressed, obviously, the North Sea market has solidified very, very quickly, and it's even improving, as Scotty mentioned, with works awarded for '23. So that one has addressed.

And I think with the Trident award early in the year and where negotiations are going with Brazil, we feel that, that position was solidified as well. And then with Q7, as of the remainder of '22 and as we head into '23 with the contracted awards in '23, we wanted to specifically address the headwinds that we faced in '22 and how we expect that to reverse in '23.

I do think, in general, though, you are thinking right about it, these are positives. And then on top of that, we've got the rate utilization and production deals to consider.

I appreciate all the color. And given your caution your comments around potential things that could go right. I'm going to hold up and save my question about returning cash to shareholders for another day. So I do want to ask this real quick and your outlook for beyond '22. You mentioned an outlook for additional Droshky-type deals.

So I wanted to ask if the acquisition of Alliance means that those deals could be shallow water going forward? And if you're seeing more interest from operators and this approach for shallow versus deepwater?

It certainly could include shallow water fields. We have looked at a few. We don't have anything in the hopper that we would consider a reasonable deal that we would jump on top of. Right now, our main focus is still towards the deepwater.

Next question from the line of Samantha Hoh with Evercore ISI.

Maybe just to expand on that last question. Can you talk more broadly about the type of synergies that you expect to see around this Alliance acquisition? I'm just kind of curious like what sort of combinations that you could have with your legacy deepwater services beyond just sort of targeting that major customer base?

As far as cost synergies, we don't really see cost synergies. It's a separate business from what we do in the Gulf of Mexico. It is additive to our story of energy transition, expanding our abandonment capability. To that extent, there is revenue synergies, I believe, from becoming a meaningful dominant player in the Gulf of Mexico and what that translates into other high decommissioning areas as far as credibility and capacity.

Some of those areas include -- we've mentioned the North Sea is a high potential for decommissioning Brazil. Each one of these divestments from Petrobras to the other players, the new players, carries a requirement for decommissioning within a certain period of time. So Brazil is going to become not only a bigger decommissioning market along with the production enhancement but you're also going to probably see wind start to make a meaningful impact in Brazil.

And then finally, in the last decommissioning market is the Asia Pacific region. It's a mature basin in Australia. They had a bankruptcy similar to what happened in the Gulf of Mexico, which has put a lot of impetus from the government on to the producers to accelerate their abandonment plans. So indirectly, I think there's revenue synergy from having the Alliance acquisition and gaining the credibility as a full-field decommissioning company.

Is there going to be any growth CapEx that you're anticipating for next year? I know the guidance that you gave stated mostly is for maintenance. It looks like you raised the upper end there. But could we see growth CapEx rise from this very, very low level that you're running at this year?

The only CapEx that I can foresee over the future years would be perhaps the addition of additional trencher because we're seeing such demand growth in that market. Beyond that, we don't have any significant growth capital requirements or aspirations actually. Having said that, in my closing comments, I mentioned M&A, we're going to balance that opportunity against ultimately returning value to shareholders.

So to the extent that there are opportunities like Alliance that result in accretion to free cash flow per share, which ultimately helps the return of value to shareholders. Then as long as they fit our strategic story of energy transition and they're accretive to free cash flow per share, we would take a look at them.

And if I could just sneak in one more. Your Robotics revenue guidance seems kind of light given that you're coming up on a typically strong third quarter. Are you just expecting a bit more of a seasonal drop off in 4Q? Or could you kind of explain like what's driving your guidance there?

There will always be a bit of a seasonal drop-off in the trenching because the trenching works in wind, as in shallow water and in the North Sea regions where the harsher conditions come along in the winter season. But we are seeing an improved market in trenching from next year. Next year, we expect to have 2 vessels in trenching completing more trenching days than this year and increasing as we go forward.

Like I said, we have over 3,000 are awarded or tendered trenching days out there between '23 and '28. I expect a much healthier year in '23, and we are also increasing rates in that area as well.

Yes. I would add to that, that we did experience a very strong first half of the year in Robotics. We had a very strong first quarter for them, which is unusual just to the seasonality and added on that with the second quarter with a couple of very successful renewables trenching program. So we had a very strong first half of the year. And at this point in time, we would expect to see a seasonal drop off in the fourth quarter.

Depending on how the market goes, that could fill in. But from our standpoint, I think that's probably a little bit the drop-off is a product of a very strong first half of the year that we had.

Next question from the line of Sid Grover, Canterbury Lane.

I believe Owen touched on this and has responded to the last question. But I was wondering if you could provide a little more color on, at a high level, how the Board is thinking about balancing M&A with returning capital to shareholders, whether there are certain internal targets for or hurdles that the particular M&A target needs to meet or whether it's a certain amount of free cash flow that's expected to go to M&A on a yearly basis? Is there any sort of color you can share about structurally how you're thinking about that?

Well, I'm sure the Board will appreciate me speaking for them, so I will. I think we're in a dynamic market. We've always thought that ultimately, especially in the recent years, there's been the greatest emphasis on generating free cash flow and returning value to shareholders as opposed to growth. I don't know there may be a little swing back on that. But bottom line, I know the Board, I think I confer confidently say that the Board is also interested in the fact that we're just too small right now. We'd need some scale.

So to the extent we've made some moves here that I think significantly increases the cash flow per share in the company for next year as well as the share -- as well as the scale. Both of those, I think, are positives for shareholder value. But the #1 priority for us will always be managing our balance sheet.

So to the extent that we do have the towers of converts coming up, we're not going to do anything that jeopardizes our ability to cash settle those. We're just at a point now where we see enough positive visibility on cash generation that there's a certain amount that we're willing to use in order to achieve better scale and accretion to free cash flow per share.

We have no further questions on the phone line.

Thank you. Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our third quarter '22 call in October. Thank you.

That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.