Helix Energy Solutions Group Inc (HLX) 2008 Q1 法說會逐字稿

Good morning and welcome to the first-quarter conference call. Alter participants will be in a listen-only mode until after today's conference. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If anyone has any objections, you may disconnect at this time.

I would now I would like to turn the conference over to the host for today's call, Mr. Wade Pursell, Chief Financial Officer of Helix Energy Solutions. Sir, you may begin.

Thank you. Good morning, everyone. Thanks for joining us today. Joining me today on the phone is Owen Kratz, our CEO; and here in Houston, Bart Heijermans, our COO; Robert Murphy, President of the Helix Oil and Gas; and Alisa Johnson, our General Counsel. Hopefully everyone has access to the copy of the press release and the slide presentation which is linked to the release. If you don't, you can go to our website at www.HelixESG.com, then the investor relations page, and click on the webcast presentation there.

So we'll start going through the presentation now, starting with slide 2. I'll turn it over to Alisa for an important announcement.

As noted in our press release and associated presentations, certain statements therein and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements. For a complete discussion of risk factors affecting the Company, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31st, 2007, filed with Securities and Exchange Commission. Also during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation, together with the reconciliation, is available on our website.

Slide three shows the outline for this morning's call. I'll summarize the financial results and turn it over to Owen for a quick strategic update. This will be followed by a Q&A segment. As we did last quarter, we've included a section in the slides and operational highlights with some financial breakdowns for both Contracting Services and Oil and Gas. For your reference, these are at the end of the presentation, and we're not going to go through these slides on the call.

So looking at slide four, for the first quarter of 2008 we reported revenues of over $450 million, which is 14% more than last year's first quarter, as we saw continuing strong demand for our services in the deepwater offset a seasonal decline in Contracting Services on the shelf, and our Oil and Gas production division generated about the same production last year's first quarter and at higher commodity prices. By the way, the production levels generated this quarter exceeded our budgeted expectations.

With respect to the more traditional seasonal decline in activity on the shelf, which is our 58% interest in Cal Dive, I would point out that they issued their earnings release last night as well and will be having their conference call at 11:00 Central time later this morning. So I would defer specific questions regarding that business to the management team.

Turning to operating cash flow, we generated nearly $239 million of EBITDAX during the quarter, which was 43% more than last year's first quarter. In addition to the increases generated from the revenue increases just discussed, we were able to sell 30% working interest in our Danny/NOONAN discoveries in two separate transactions for a total of approximately $165 million, plus their obligation to pay 30% of all future related CapEx and an obligation to pay up to $20 million in the future if certain production milestones are met. The first transaction, for 20%, closed at the end of the first quarter, resulting in a gain of over $61 million. The other 10% closed last week, which will result in additional earnings for the second quarter.

I should also remind you that, on the Oil and Gas side, $14 million of impairment was recorded in the first quarter for Devil's Island, which we disclosed to you to on the last earnings call a few minutes ago.

Diluted EPS for the quarter was $0.79 per share, which was 32% more than last year's first quarter. That increase is less then the operating cash flow increase, due mainly to higher interest expense, $26 million versus $13 million, due to increased debt levels to fund our large capital program, nearly all of which has not yet contributed to earnings; and a higher tax rate this year, 36.6% versus the 34% last year, due mainly to our providing a non-cash deferred tax for Cal Dive earnings this year, as our book basis has now exceeded our tax basis.

Turning to slide five, a few months ago we shared outlook for 2008 with you, which is essentially our internal budget. We had solid first quarter, exceeding our budgeted expectations. As usual, there are a lot of moving parts with respect to our initial assumptions, both positive and negative. You might recall the $3.36 per share budgeted amount for the year included $2.21 per share of base earnings and the remaining $1.15 related to increased earnings from Oil and Gas sell-downs.

At this point we're comfortable reaffirming the base earnings number, and that's without consideration of positive commodity price impact versus our assumptions. And, we're currently reviewing the extent of further Oil and Gas sell-downs.

With that, I will turn it over to Owen for a strategy discussion.

I'll speak beginning from page seven on the slide show. I think the thing that I'm most pleased about with the first quarter is that we have executed what we said we were going to do. On the left, you can see the objectives that were stated previously and, on the right, a little bit of an update. And then, to give a little color to those, we did sell down Danny/NOONAN, as Wade mentioned. This one deal alone is a little over 50% of the production that we said that we would be selling down. I will tell you, the onshore properties look like they probably will close soon, and things are progressing well there.

On the next objective, it was to complete our service assets. On the Q4000, it is out of the shipyard now. It's on sea trials. But, having said that, I do have to let you know it's about a month late; but at least we are out of the tunnel and we're in the final stages.

The Caesar looks like at this point that it will be late coming out of the China shipyard. I know there has been some rumors there about problems with our stinger, and I just wanted to shed a little light about what's actually going on. The stinger is fine. The hitch blocks that go on the back of the vessel that support the weight of the stinger, we basically -- the welding procedure was not done adequately and we rejected it. That required us to go back and have new stinger blocks fabricated, and that's a major delay. So I just wanted to clear that air. We will be giving further updates as to what that means for the Caesar schedule.

Moving onto the Helix Producer I, I believe many of you will remember I mentioned that I was concerned about the progress of the work out in the Croatian shipyard. A milestone to look for would be the vessel leaving in May to transit to the US, where it's under our control and we can progress things with a little more visibility. At this point, I would still have to say that it's looking probable that that sailing date may be late. But again, we'll give updates as we go there.

On a brighter note, we did have the opportunity to acquire new ROV's without the long wait of manufacturing, and they immediately go into our fleet. This was a recent transaction.

The NOONAN development looks like it's progressing well and could possibly be ahead of budget and schedule. And then the Phoenix project, that's really dependent on the Helix Producer I schedule, which will have to be updated later on.

The thing that pleases the most, I think, is that we are outperforming our guidance. We had some negatives in the first quarter. The Q4000 was out for the full -- but let me just say that the negatives that I'm mentioning here are negatives that we did anticipate and were fully considered in our expectations and guidance. The Q4000 was out for the full quarter in the shipyard, having the upgrades done. Devil's Island dry hole, the remaining part of that hit in the first quarter. We had the CEO severance paid, and we were expecting the Cal Dive seasonal slowdown.

Having said that, there's even -- I think, while I'm on the negatives, if you look at year-over-year, I think the major impact between last year and this year is the seasonal slowdown of Cal Dive and Devil's Island, Q4000 and the severance issue. Beyond that, we had even stronger positives, though. We had most of the contracting groups producing at stronger than expected performance levels. We had strong commodity pricing.

But I'd like to mention that when I'm talking about relative to performance as I'm watching the Company, I'm really talking about without commodity price. Finally, we did have a stronger than expected production rate, which is very pleasing.

It's been a really good start to the year. But, as Wade mentioned, there are issues going on, both positive and negative, mostly issues with the shipyard which we'll clarify when we can. But we still believe that we'll meet or exceed our guidance. Again, that's without the help of commodity price, based on stronger performance, better than expected, and sufficient contingencies that were built into the plan.

Almost certainly, we will meet or exceed expectations if commodity prices hold at these levels. But until there's a little better visibility on the qualification about the positives and the shipyard impact, we're not quite prepared yet to say if or how much we're going to beat the guidance. If things keep trending the way they are right now, which is a great thing, we'll probably be ready to say more at the next earnings call.

With that, I'll just open it up for questions.

(OPERATOR INSTRUCTIONS) Jim Rollyson, Raymond James.

Owen, first off, just looking at your guidance for the year on the deepwater side or the service side, I think your margin expectation for the year was kind of mid-20s, 26%. Had a lot of things going on this quarter -- seasonality, Q4000 being out, Seawell out for at least a month, all that coming back in and fully booked. Do you still think you're tracking pretty well to get up there for the year?

We've got Bart on the line here, so I think I'll let Bart, who's head of all those operations, speak to it.

Yes. I think, despite, I mean, a couple of the negatives that you mentioned, I mean, the service business has done pretty well, especially the deepwater side, which is really in deepwater pipeline, construction vessels and robotic support vessels. They have done very well. The Seawell had a slow month of January. The rest of the year looks positive. So yes, we definitely think that the budgeted margin number is achievable, and hopefully we can do a little bit better.

Your partner in the Independence Hub obviously said mid-May for being down. Assuming that that's correct, Wade, maybe thoughts on the EPS impact of that? And secondly, you guys doing any of the repair work?

Yes. As far as dollar impact, Jim, if it really is mid-May, that will probably be $0.01 to us, probably $1.5 million or so, as far as the work we're doing -- Bart?

Yes. Cal Dive has had a vessel out there, [DSV], for some of the repairwork. That vessel is going to be back soon, hopefully, to complete the job.

Owen, you made your first property sell-downs, sounded like the onshore stuff you said was kind of tracking to hopefully be pretty soon. Any good progress going on, on the other things you had targeted for the year?

Yes. The first two we took a rifle-shot approach in approaching certain buyers that we knew had an interest. The remaining properties are being marketed by a bank, and that has got a definitive schedule with the data room and bid submission. So I don't see any hiccups in meeting the timing expectations of that.

Well, great. Good quarter.

Stephen Gengaro, Jefferies.

One, I thought, and maybe I was wrong, that Caesar was a critical path item for Danny/NOONAN. But it looks like the Caesar might be late, but you're optimistic that Danny/NOONAN will be on-line, on-time? Can you reconcile that?

Yes. Let me be a little clearer about that. The Caesar is critical path on the Danny pipeline, which is a pipe and pipe -- oil pipeline, and that was never scheduled for production in '09, so there's no impact there. The NOONAN pipeline does not require the Caesar, and the NOONAN -- the gas portion, the larger portion of that development, is the one that's looking like it's possibly ahead of budget and schedule.

I know you're not going to give us quarterly guidance, but when I read you outperformed your budget for Q1 -- does that include or exclude the sale?

Yes, excluding the sale, we outperformed our budget for the first quarter, Stephen.

And again, I know DVR is going to have their conference call later. We expected seasonal weakness as well. It was weaker than we had thought. Were their results in line with your expectations?

Yes, they were.

I'll add a little to that. We used just below the midpoint of the Cal Dive guidance in our expectations. From now on, I think I'll be setting a trend. When I'm talking about our performance of each quarter, I really try and strip the noise out of it, the gain of sales and the impact of any positive commodity pricing. So as I speak and say we had a really strong quarter, it was excluding those events.

When we look at that CapEx program going forward, and it now looks like I guess your partners will pay about $70 million of the development costs, how does the CapEx look for the rest of this year, maybe even what's left on -- I guess it would be a well enhancer, I guess, in the first quarter '09?

I don't want to get into too much detail, but I guess we had guided for the year $800 million of CapEx combined. I think, total, for the total Company, that number is probably closer to $850 million, up to $900 million, if you are setting a range, depending on sell-downs. Sell-downs will play a big part of that.

As far as then going into '09, the stub that's left is still in the $35 million range, probably.

Beyond that, sort of an ongoing maintenance level for the Company? Is there a good number to use?

Yes, I would say, from a maintenance CapEx standpoint it's maybe $100 million range for the services. On the Oil and Gas side, it really depends on what the expectations are with respect to maintaining Oil and Gas production. But you're talking something more in the $250 million, $300 million range, I think on the Oil and Gas side.

Just to break it down a little bit more, the maintenance CapEx, on the fleet, I believe, is going to be a little less than $100 million. But then, on the shelf production, our goal is not to offset decline completely on the shelf, but let it trend like it is now with offsetting partial decline, targeting something like $150 million a year budget there. Another probably $100 million on a start-up, again, of our deepwater drilling program. But, as I've said in the past, we are not planning to drill anymore 100% wells. So that $100 million would be covering multiple wells at a lower interest rate.

Your production guidance for the year -- I think it was 69 B's, pre any sales and like 64.5 after sales; I think that's right. Are they still good numbers?

Yes.

Roger Read, Natexis Bleichroeder.

I guess what I want to try to understand -- in your offshore construction space, what can really ramp up? If I look at how the Intrepid and the Express did, those would look -- that's kind of consistent performance on the rest of the year, with the moving parts being whether or not you're working on your own projects or not, I suspect. What can the Q4000 do for you this year? Can you walk us back through the [Shelk] frame contract that signed there in the Gulf, and then kind of what kind of construction work it may do? I'm just trying to think about where Q1 performance was and what that could mean for the remainder of the year.

Bart, you want you walk us through the backlog?

Yes. If you start with Q1, clearly, the Seawell had a slow start because the client canceled the contract in January. The rest of the year looks very good. So that's going to be a positive change. The Q -- I mean, same story. We have it rest of the year booked and pretty good margins. That has been the frustrating part is that we have this great backlog this year and also for the next couple of years. We were pretty excited about what this vessel can do in the Gulf of Mexico. But it took a little bit longer to get it out of the shipyard. But that's going to be a positive change, for the rest of the year, compared with the first quarter.

Express and Intrepid should be pretty flat. Then on the Canyon side, we're going to add this Island Pioneer DP vessel to our fleet that is going to, starting in June, is going to work in the North Sea for the rest of the year, using the I Trencher, the new 2000-horsepower Trencher that we are building that is pretty close to being finished, being completed.

So we have got a lot of things, a lot of assets that are going to contribute more for the rest of the year than they have done in the first quarter.

Correct me if I'm wrong here, Bart, but the Q4000 backlog for the remainder of the year is, it's mostly in well intervention work that has been previously contracted. We do have some drilling type activities for third parties, and the only work that we have scheduled for internal support of VRT is a completion out on the Phoenix field.

That is absolutely correct. The only internal work is this completion which is expected to take around 45 days or so. So the rest of the year is all for third parties. Of course, also, the Phoenix work is -- there's a third-party component there. Sturgis owns 30% interest in the field.

Overall, what we have seen, demand for the Q is strong. Also because the demand for deepwater drilling rigs is still strong and we expect the demand for deepwater drilling rigs to continue for the next couple of years, which allows the Q -- allows us to use the Q as a well intervention vessel at very attractive rates.

Just a little bit more on the Q, just because it has been a vessel with a lot of promise but it had trouble delivering consistently. With the exception of the work on Phoenix, and assuming the thruster issues are all taken care of now, this vessel should operate pretty much like the other Gulf of Mexico vessels in terms of utilization. And if utilization is there, it sounds like the backlog is fine, the margins ought to be significantly better than what we've seen historically on this vessel?

For full disclosure, though, we've done an awful lot of -- most of the cost overrun on the Q4000 was not associated with the drilling upgrade. That was pretty well in hand. We've done an awful lot of work to try and increase the uptime status on the Q4000. We've added cost bracing on the whole to stiffen it up. We've changed out power management, we've done an awful lot.

I will say, though, that we -- due to deliverability issues from Rolls-Royce, we are running with some old gear sets, that as the new ones come in, we're going to have to replace them over time. But with the exception of that one weak point, the Q4000 should operate much stronger and with much better uptime from here on.

And then shifting gears just a little bit, what is the expectation on production volumes kind of Q2-Q3, ex a NOONAN startup?

We are pretty much flat. The start-up, we are looking for increased production in Q4, maybe a little in Q3, but primarily Q4.

So this approximately B's a quarter is the right way to think about it?

Right. Now that we've sold, you are from that 69 down to the 64 flat that we were looking at, in our last call.

Okay, thank you.

Jim Gibney, Capital One.

Bart, I was wondering if you could update us a little bit. How should we think about it on the vessel delay side as we look to 2009? Any impact here, and your thoughts on the well enhancer and when that's going to be coming in?

Well, I think the well enhancer is the vessel that -- it's a new build vessel; it's nothing of a conversion, like the other two and that vessel is still pretty much on schedule. The launch of the vessel is scheduled for May the 31st in the Merwede Yard in Rotterdam. And then there's going to be another eight months, nine months of work that has to take place on that vessel. We feel pretty confident that this vessel is going to be -- will become operational in the first quarter of 2009, and it's got work contracted already in 2009. So we feel pretty good about that vessel.

Just following up on the deepwater contracting side, I appreciate the color on some of the contracts. But how should we think about subcontractor work and the proportion there and its impact on margins as we work our way through the back half of the year? Do you see that tapering off? I believe that was some of your commentary coming out of last quarter's call. Is that still a fair assumption?

I think, if you look at our model, where in the past, we really -- Helix or Cal Dive used to be much more in the -- I mean, contract to contractor, where our model has shifted where we have become more of a prime contractor. So we will continue to have a decent amount of subcontracting work and pass-through work, which will lower the margins but should increase the total profit contribution.

Also, on the chartered vessel side, I was just -- [first off] with Canyon -- in the first quarter we had five vessels on charter. And you can see the earnings contribution from the Canyon was pretty strong. Compared with last year, last year Canyon had -- only in the first quarter -- only had two vessels on charter. So we have gone from two to five. And as you can see, the profit contribution year over year for Canyon has grown, but I mean, the more vessels you have on charter, the return on capital employed is going to go up, which is a positive thing but the margins will get compressed. Although I think, if you look at our model and the 25% gross profit margin, it's still very healthy compared with a lot of our peers in the deepwater.

Sure, that's helpful. I appreciate it. Owen, just one follow-up. Could you give us an update here, kind of your 30,000-foot view on your Cal Dive ownership position? Any update relative to your commentary out of fourth quarter?

No, and I don't want to step on anything that Cal Dive might have to say, but everything that's going on there is pretty -- it was anticipated. I think our position still remains the same at this point, that we want to be a rational investor. We believe that Cal Dive has got its best growth ahead of it. So right now, we're not -- we wouldn't go into the market to lower our interest in Cal Dive right now.

Having said that, at the right price, I guess anything is for sale. But there's not an intention of selling down right now.

Okay, that's helpful, I appreciate it, [I'll] turn it back.

Michael Bodino, Coker & Palmer.

Just a couple of follow-questions on -- versus guidance. I know DD&A on the E&P side, guidance is 315 an M. There was some stuff in the quarter got your DD&A up to 455. Is guidance still good there, or should we tweak that a little bit?

If you look at that CD&A and strip out the Tiger, or the Devils Islands, you're running about 345, 346, and we guided to 315, I believe.

For the year.

For the year, and that's going to come down once we bring the new deepwater production on.

So, you kind of keep it flat to 345, 346 next couple of quarters and then (multiple speakers) down?

Right, right.

That same question, kind of, for LOE's. You guided for 202, and you put up a 164 similar to the fourth quarter. How do we think about LOE guidance?

Again, the LOE went up relative to Q4 just because the volumes went down. So on a unit basis, it's relatively flat from Q4, from just a cash standpoint. But again, that impact is volume-driven.

And it should go down late in the year just (multiple speakers)

Right, right.

Deepwater.

Okay. And, relative to the assets that you all are thinking about selling, we've certainly talked about onshore before. But can you give us some more color on what other assets you're thinking about possible monetization of?

I think, due to the amount of Q4000 activity and the amount of contracting work to be done on Phoenix, our first target would be to sell down an additional 30% of Phoenix. That would lower the eliminations between the Company, lay off the greatest share of capital going forward and still leave us with a significant interest.

Do you have a time line that you hope to accomplish there?

Wade, do you [now] have the latest update from the bank?

I'd just say, in the near-term. I don't think we can say anything more than that, Michael. But, it's something that we had hoped, and I think we even said in our guidance, to be done somewhere around the middle of the year and I think that's still what we're looking at.

Other assets beyond Phoenix and stuff in Mississippi -- is there a lot of other assets that you all are looking at, in terms of rationalization?

We've been receiving some interest on other things, but at this point that's as far as our -- the expectations that we had for the year, that's as far as we were going. We'll look at things and reassess, but right now that's our plan.

One last question, and I know Cal Dive put some numbers out. I know, historically, you all have. How is the backlog on the balance of the year shaping up? Have things continued to show a high level of activity and you're getting a lot more interest, or how do we think about that, both domestically and internationally?

The backlog on the [service] side still looks pretty good. The areas that we are in on the well intervention side, in the Gulf, and then deepwater construction, that's more the niche areas, like well intervention in Southeast Asia. We are still seeing growth in those areas.

I'd just add just a little market flavor. What we're seeing is that the demand for Contracting Services still remains incredibly strong on a global basis. There are bottlenecks within certain niches, primarily around sourcing enough skilled personnel. The one area of weakness that we are seeing is on the spec-built DP vessels. We are starting to see some fluctuation in the charter rates, which is one of the reasons why we've stepped up and added more vessels into Canyon. That's a good thing for us. The vessel rates are coming down, yet the contracting rates are staying high, so that bodes well for us.

Congratulations on the quarter, and keep doing what you're doing.

Sunil Jagwani, Catapult.

I have a bunch of mini questions. Firstly, I guess I'm not clear regarding what your plans are about how you would replenish your E&P inventory because you acquired the assets one or two years ago and then you started to sell some down. When you talk about drilling partial-interest wells, how are you going to replenish the inventory for those wells?

I'll let Robert talk to it after me, but we plan to remain active in resales. We're adding acreage all the time. We already have a significant amount of acreage. We have over 25 deepwater prospects alone, still in inventory, to be stored, and we are adding additional prospects every day. The group up in Dallas continues nonstop in generating prospects and acquiring acreage.

Okay. And then just, along those lines, you talked about roughly $900 million in capital this year. I'm guessing that, with a couple of projects under development, is it unfair of me to assume the bulk of that going to E&P?

No. In our initial guidance, we said about half of it was the services assets that we talked about earlier, and that's still the case.

Okay. So it's closer to 50-50, not mostly E&P?

Correct.

Lastly, how much, if any, did you gain from your exposure to the pound, the vessel in North Sea?

Exposure to the pound? I think the pound has been pretty flat with the dollar. I mean, the euro has become much stronger in the last quarter, which has impacted us on some of these conversions and new builds. But, the pound and dollar -- I don't think that exchange rate has changed any.

Of course, the Seawell -- Seawell's contribution in the first quarter was not significant. But, we expect that contribution to become much more significant the rest of the year. So, if the pound would strengthen against the dollar, then that would have a positive impact for our North Sea contribution.

Just to give a little philosophy on how we try and operate with these capital projects as well, we have a lot of foreign currency costs associated with these capital projects. We try and match that with our foreign currency income. So, the pound relative to the euro is an important metric for us. The fact that the pound has been tracking closer to the dollar in the last quarter means that we've incurred some additional currency cost, exchange cost, on the capital projects, which has increased the cost. (multiple speakers) but on a cash basis, it's a wash.

And just last question, maybe you can give us an overview of what you see in the market for increasing supply on the deepwater vessels, [construction and stuff]?

I'm sorry; I missed the question.

Just an overview of how you see the supply picture evolving in the deepwater market, the deepwater construction vessels?

I think, on the specialized deepwater construction vessels, there is an increase in supply. But also, Owen mentioned earlier, there's also an increase of demand. So hopefully, that's going to remain balanced. What we have seen is that there are -- there's a large amount of ship owners that are trying to become active in this market as contractors. But I think we have the type of tools with the trenchers and the ROV's and some of our pipelay systems to add value to those vessels. So I think we'll be more successful deploying these vessels as construction vessels than the ship owners will be.

And, just to add a little more color philosophically, if you look at our model, we are a niche player. If you look at each of our vessels, they're the upper end. At this point, I don't believe we have a vessel in the fleet that's older than 10 years, and they are very specialized in the upper niches of the market. And, that was by design so that we don't get into the -- we are a little hedged against the supply-driven softening. Where we charter vessels is in the ROV group, and that's for a number of reasons. One, it allows us to always charter the latest and most modern vessels in the ROV fleet. And also, that's the area of the market where you see the weakening. When you have a lot of what [Tom Merritt] used to call the me-too type vessels being built on spec in the shipyards, they're multipurpose vessels, and therefore, they tend to trickle-down in the niches of the contracting.

And the last niche we usually have occupied was the ROV niche, and that's where we are seeing the initial softening in the vessel rates.

Okay, well thank you so much for your answers.

I have no further questions standing by at this time.

Okay. Thanks, everyone, for joining us this morning, and we look forward to reporting to you next quarter and hopefully seeing some of you at our annual shareholders meeting next week. Thanks.

This concludes today's conference call. Thank you for joining.