Helix Energy Solutions Group Inc (HLX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the review of second-quarter 2012 results conference call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

Today's call is being recorded, Tuesday, July 24. I would now like to turn the conference over to Terrence Jamerson. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today. Joining me we have Owen Kratz, our CEO; Tony Tripodo, our CFO; Cliff Chamblee, Executive Vice President of Contracting Services; Johnny Edwards, Executive VP of Oil and Gas; Alisa Johnson, our General Counsel; and Lloyd Hajdik, our Senior Vice President of Finance.

Hopefully you've had an opportunity to review our press release and the related slide presentation released last night. If you do not have a copy of these materials, both can be accessed through the Investor Relations 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, Alisa Johnson will make a statement regarding forward-looking information. Alisa?

Thank you. During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this conference call or in the associated presentation other than statements of historical fact, are forward-looking statements and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of factors, including those set forth on our slide 2 and in our annual report on form 10-K for the year ended December 31, 2011.

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 GAAP measures to comparable non-GAAP financial measures. The reconciliations, along with this presentation, the earnings release, our annual report, and a replay of this broadcast are available on our website. I will now turn this over, for some opening remarks, to Tony Tripodo.

Yes. Owen, did you want to take slide 5 or you want me to start on slide 5?

(multiple speakers) I'm here now, Tony. I will go ahead. Moving on to slide 5, which is the high level summary of second-quarter results, quarter two's revenues decreased from $408 million in Q1 to $347 million this quarter, with most of the decrease attributable to the Q4000 and the Seawell being out of service for a good part of the quarter, as they underwent the regulatory dry dock, as well as lower oil and gas revenues resulting from lower production levels.

Both dry docks ran longer than we had planned. And, consistent with the decreased revenues, we also reported lower earnings and operating cash flow. Nevertheless, given the fact that our two historically best contributing assets -- the Q4000 and the Seawell -- experienced a lot of non-revenue producing days, we still managed to generate $152 million of EBITDA.

On to slide 6 and 7, quarter two's reported EPS is $0.42, which is inclusive of absorbing $15 million of impairment charges or $0.09 after tax associated with the decision to cold stack our oldest pipelay vessel, the Intrepid. The Intrepid was due for its regulatory dry dock in April and, based on the lack of contract visibility and the amount of expenditures that we projected would be required by the regulatory dry dock, we determined it was better economic decision to cold stack the vessel. The Intrepid has not really contributed anything to the bottom line for us lately. Canyon, our Robotics business unit, as well as Subsea Construction, continued to put up good numbers in the second quarter. The Express, our other real pipelay vessel made a nice contribution to our results in Q2 from a Subsea Construction project offshore Israel.

Our oil and gas production in the second quarter totaled 1.7 million barrels of oil equivalent, down from 2 million barrels of oil equivalent in Q1. Quarter two's production decline was impacted by a prolonged shutdown of our South Marsh Island 130 deal for repairs, as well as natural declines. We continue to benefit from our oil production being sold at Louisiana light sweet prices, which is at a significant premium to the west Texas intermediate prices, realizing $107 plus a barrel net of our oil hedge contracts. In addition, natural gas liquid production, along with our natural gas hedge contracts, allowed us to realize $5.76 for our natural gas production in Q1. Additionally, we're very pleased to report last week the success from drilling the Danny II well. Johnny will speak to that later. Tony?

Yes, okay. Thanks, Owen. From a balance sheet perspective, we continue to strengthen our financial condition. Our net debt position decreased from $560 million at the end of quarter one, to $531 million at the end of Q2. Our cash balances increased to $650 million at the end of Q2, from $546 million at year end. So, we're in pretty good shape right now. And with that, I will turn the call over to Cliff for an in-depth discussion of our Contracting Services results.

All right, thanks. Good morning, all. As you can see, Contracting Services were slightly down compared to the first quarter, with total revenues of $230 million. However, still $38 million higher than the second quarter of 2011. Our gross profit margins are 20% -- were at 20% lower than both last year and last quarter, primarily due to three of our vessels being at the dock for a substantial portion of the quarter. As a result, we had lower utilization for Subsea Construction and Well Intervention vessels at 73% and 67%, respectively.

Moving on to slide 7 (sic - see slide 10), this slide shows the equity and earnings contribution of the Independence Hub, Marco Polo, and the SapuraCrest JV. A couple of key highlights here -- our earnings at the Independence Hub are lower in Q2 due to the expiration of the supplemental monthly demand fee that ended at the end of the first quarter; also the $4 million under SapuraCrest JV for the second quarter is recovery, freely estimated loss, when we completed our exit from this joint venture in April.

Moving on to slide 11, as Owen mentioned earlier, the Q4000 was in dry dock longer than we expected, which put her at 45% utilization for the quarter. Over to the North Sea, the Well Enhancer was 100% utilized for the quarter, while the Seawell was in dry dock in April and a portion of May. Outside of our last dry dock, the Well Enhancer coming up in August, our Well Intervention assets remain fully booked for the rest of 2012 and we continue to improve visibility into 2013 and 2014, with the Q4000.

Moving on to slide number 14 (sic - see slide 12), on the Robotics side, Canyon continues to experience high utilization for the construction support vessels, as well as the trenchers over the North Sea. For the second quarter we added three more ROV systems to our fleet, which were immediately put to work on long-term contracts. Our latest trencher, the T1200, was mobilized onto a spot vessel and put into service in June. We anticipate taking delivery of the Grand Canyon vessel in the third quarter, as well as continuing to expand our ROV fleet with three more assets.

Moving on to slide 13, in Subsea Construction we had a strong utilization of both the Express, which finished the campaign offshore Israel, and the Caesar, which continues on accommodations work down in Mexico. Due to the lack of work moving forward in 2012, and with the associated cost for the dry dock, we did decide to cold stack the Intrepid. We did manage to extend the Caesar contract through July of 2013 and continue to firm up more work for the Express in the fourth quarter when returns back to the Gulf of Mexico. On slide 14, I will leave this slide detailing the best utilization for your reference. With that, I will turn it over to Johnny for the Oil and Gas side.

Good morning. Please turn over to slide 15. Both slides 15 and 16 provide the financial highlights for Oil and Gas for the second quarter. Production and revenue for Q2 2012 were lower than Q1 for Oil and Gas. The difference in production, in addition to the normal decline, was due mainly to downtime on two of our larger shelf deals, including SMI 130 that Owen mentioned, for facility repairs and downtime from tropical storm Debby -- we did have some downtime due to that -- and downtime in one of our fields from some third-party pipelines. Our production mix in Q2 was 73% oil.

Turning over to slide 16, our operating costs were slightly higher in Q2, with the major difference being in our workover expense category. The higher workover expense were largely a result of the facility repair work on the two shelf properties that I mentioned previously. Looking forward, we are excited about the new oil discovery on our Danny II well in the Bushwood field. We are currently in the process of completing the well. We are waiting on the lab for detail results from the composition analysis results of the liquid samples obtained by MDT tests, but we expect to be able to flow the Danny II well back to our East Cameron 381 facility through the same flow line as we flow the Danny I well. Utilizing the existing infrastructure will allow us to start up Danny II early in the fourth quarter. Danny II should produce in excess of 3,000 barrels equivalent per day, net to our interest.

Also in the Bushwood field, we have the Nancy well, which was drilled in fourth quarter of 2008. It has been completed and it is waiting to flow. The first production from Nancy is now estimated for Q4 of 2012. This gas well will add over 2,000 barrels equivalent net to our interest per day.

The Phoenix field and the HP 1 continue to produce very well in Q2. We have received the APD and contracted a rig to drill our Wang well. The rig for the Wang well will not be available now until early Q4. Therefore, we have scheduled first production for Q1 of 2013. If successful, the Wang well will also add over 3,000 barrels of oil equivalent per day net to our interest. Lloyd?

Thanks, Johnny. Turning over to slide 17. Slide 17 provides a summary of our current commodity hedge positions for the second half of 2012 and for the full year of 2013. For the remainder of this year, we have approximately 2.6 million barrels of oil equivalent hedged, which covers approximately 79% of our forecasted Q3 and Q4 combined production. For the full year of 2012, we have hedged approximately 74% of our estimated combined oil and gas production of 7 million barrels of oil equivalent. During the second quarter, we entered into additional Brent crude oil hedges for 2013. And, as a result, we have hedges in place totaling approximately 3.7 million barrels of oil equivalent.

Our 2013 floor price for our oil hedges is approximately $100 per barrel and for natural gas the floor price is slightly above $4 per Mcf. Regarding our oil hedges, approximately 90% of our current hedges in place by volume, for the remainder of 2012 and for 2013, are based on the Brent benchmark, as there continues to be a significant spread between WTI and Brent. The actual spread in the second quarter between WTI and what we actually received for our Gulf of Mexico crude sales was approximately $13 per barrel.

Turning over to slide 19, this slide profiles our current gross and net debt levels and liquidity position at June 30. Gross debt of $1.18 billion was essentially unchanged from March 31, but our net debt decreased $29 million to $531 million, as our cash on hand increased to $650 million from $620 million and our current net debt to capitalization ratio stands at 25% at June 30. Our liquidity position remained at a very healthy $1.1 billion, the same as the end of the first quarter.

Over to slide 20. Slide 20 provides a current update on our overall debt maturity profile as of June 30. There have not been any significant changes in the debt profile since the end of March, other than scheduled loan amortization totaling $2 million. I would like to point out that the holders of our remaining 3.25% Convertible Senior Notes, due in 2025, have their first option to put the bonds to us in December of this year. After this optional put of the 2025 Convertible Senior Notes, our next nearest term maturity is not until July 2015, when our credit facility matures. The maturity dates of the term loans and the revolver, which comprise the credit facility, can be extended into 2016 if we have refinanced or repaid the remaining $275 million of our 9.5% Senior Unsecured Notes in full by the 2015 maturity date. Tony?

Thanks, Lloyd. Moving on to slide 22, we're holding our EBITDAX forecast for all of 2012 at greater than $600 million. The key variables impacting this forecast, in addition to the commodity price assumptions shown on this chart, are little or no tropical storm disruptions impacting our Oil and Gas business from this point on and the onset of production from Danny II at the beginning of Q4.

As Johnny mentioned, we expect to complete this well by mid-August. We have lowered our production forecast for the entire year at 7 million barrels of oil equivalent based on some of the downtime we had in Q2. And this is slightly lower than our original forecast of 7.5 million barrels. Furthermore, we have adjusted our all-in commodity price forecast to reflect the down tag in oil prices we have seen since the end of Q1. We now forecast to realize $98 for our oil production for the remainder of 2012, net of hedges. Again, despite the lower production levels and oil price assumption, we still expect to generate in excess of $600 million of the EBITDAX for the year, and this is directly the result of a strong outlook for our Contracting Services business.

Our Well Intervention vessels continue to expand backlog and the Q4000 is now booking backlog into 2014, while the Seawell and Well Enhancer are nearly fully booked for 2013. Robotics continues to run at high activity levels for both the oilfield and the renewable energy markets. The Grand Canyon expected to join the ROV support vessel fleet in August. And our newest trencher, the T1200, is already in the water and contributing.

Our CapEx estimate for 2012 is now $635 million, up from our original forecast, as a result of the announcement we made this morning on the acquisition and conversion of the D534 drillship, which is estimated to have an all-in capital cost of $180 million. Additionally, $130 million of the $635 million in CapEx slated for the new Q plus Well Intervention semi, of which we already paid some $60 million in the first quarter.

Aside from the Grand Canyon for our Robotics fleet, we have contracted two additional ROV support vessels under long-term charter arrangements based on a very favorable outlook for the ROV business, both for the oilfield and for the renewable energy market. Both of these vessels are copycats of the Grand Canyon vessel -- and these two vessels are expected to be delivered in 2013 and 2014, respectively -- and will either replace existing long-term chartered vessels in our Robotics fleet or, depending upon market conditions, will actually serve to increase our ROV support capacity in the future.

I will skip slides 27 and 28, leave them for your reference. And at this time I will turn the call back over to Owen for closing remarks.

Thanks, Tony. Things are pretty exciting for Helix right now. As you know, we have put a lot of effort into building our balance sheet strength and refocusing on the Company's service contracting. We're well positioned for the increase in demand that we see for our services, especially in well ops and robotics, and we're into the initial phase of some exciting expansions of our capacity in these areas.

In well ops, over the past 12 months, we have or are adding one new intervention riser system that we're currently renting to producers for use on their contracted drill rigs. We're in construction on another system that will be deployed on a newly chartered vessel. We're in the process of modifying this new chartered vessel for application to the light Well Intervention market in 2013. We announced and started work on the Q plus, the next evolutionary step-up from the Q4000 for heavy intervention markets starting early 2015. And we've just announced the acquisition of a drillship that we will modify for heavy intervention in the flood and abandonment market. We're also beginning the construction of another intervention riser system and we're assessing additional vessel additions, depending on our financial strength, as we believe we will still be asset constrained following these additions.

In Robotics, we have or are adding 10 work class vehicles, all of which have their first full year of contribution in 2013. We're successfully -- we've successfully introduced ROV drill as a new and viable technology for the geotechnical quarrying market. We've now taken delivery of our new T1200 trencher, as Tony mentioned, which recently went into service on an interim vessel as we await delivery of the new built chartered vessel, the Grand Canyon. We've also committed to two new -- two additional new build vessels that we added to our fleet, one each in 2013 and 2014. We do see the demand and have intentions of continuing this growth.

All of this is pretty exciting for us and it will be reflected in our 2013 forecast as we go through our budgeting process later on this year. And at this time, I will -- we will be happy to take any questions.

(Operator Instructions.) Our first question comes from the line of Jim Rollyson with Raymond James.

Owen, could you give us a little more detail on the Discoverer 534 just in terms of once you get this converted and up and running, maybe what kind of capacity you think this holds, maybe in relation to the Q4000 and kind of relative pricing for this asset versus what you've got in the Well Intervention fleet today?

That's an awful lot, Jim. I don't know how specific I can get on everything right now. She is a drillship. She has had a remarkable career drilling. So, very successful. We are going to be making some modifications for her to make her more efficient for the intervention market. And we're targeting heavy intervention. So it should be able to do most of what the Q4000 can do. But I think primarily the -- we've had a lot of interest from clients, not just in the Gulf of Mexico, but from other regions as well, looking for a P&A solution. And we just are completely asset constrained. So by having this asset, it allows us to tackle the demand that we're seeing from clients in a number of regions, as well as perhaps shift some work off the Q4000 and keep it available for other work.

Are there opportunities or do you have any desire to pursue any other assets like this for similar type business or is this kind of a one-off deal based on customer demand.

I think we will look to sort of the market to dictate that, Jim, as well as our balance sheet. We can only -- I think we're adding assets about as aggressively as we can right now, given our financial strength. We don't want to re-lever the Company back up. And we also are pretty maxed out on the human resources that we have for initiating growth. So we're moving about as aggressively as we can. Like I said in my comments though, we are still assessing other options and we will be looking at additional vessels in the future, because this is something that is not going to be enough to meet all of the demand that we're seeing.

Sure. Last one for me. You guys have been pretty positive in commentary about the robotics business, obviously adding some assets, some more work class ROVs and support vessels, et cetera. Can you maybe characterize kind of how that -- the pricing is in that business today and how you see that going forward and maybe compared to what it has been over the last few years?

Cliff, I think you're probably closer to that and could answer a little better.

Okay, yes, sure. The pricing is one thing, but sheer volume of work is the other. Besides our traditional oil and gas work, where we started, there is also the wind form work, the renewables energy work that is continuing to grow at a pretty aggressive rate in Europe. So that is one side of it over in the North Sea. And over on the Gulf of Mexico side, we have also -- after post Macondo and the permits getting re-released and rigs coming back to the Gulf, et cetera, we're anticipating more work in the Gulf that we're already seeing and we've tied up with a major contractor here and we've got a pretty good relationship for doing construction work. As far as the pricing, they're continue to creep up. It is a bit of a supply and demand thing. So different times of the year, different regions, they're higher. But we've also seen some of the post hurricane work in the Gulf, several contractors popped up, and after all the hurricane work was done, those contractors seem to be evaporating. So there is less players here in the Gulf of Mexico. So, yes, we do anticipate the rates to go up while we're contracting these three boats.

Great. Helpful color. Thanks, guys.

Our next question comes from the line of Martin Malloy with Johnson Rice & Co.

You mentioned that you're building a few other Well Intervention systems. Is there any help you can give us in terms of the capital costs of those systems and the returns that you look for?

The capital costs is a little difficult to nail down because you have differing regulatory environments for each of the regions in the world. We've been doing a lot of the work over the last few years in trying to standardize, but, handle hard, I can't tell that we have got one standard that suffices everywhere. The capital costs, I can tell you, ranges from $15 million to $35 million, depending on the type of system requested.

And then with regards to the Caesar vessel, has there been any change in terms of the outlook for potentially getting some pipe lay work for that vessel after the Pemex job that it is currently on?

Yes, I can probably answer that, Owen. Well, I think as I said in the slide section there, we're contracted down in Mexico now through July of next year. And our plan is to -- we're bidding, actively bidding S-lay pipe work for the Caesar now and our plan is to continue that and stop the work down in the accommodations in the end of July, and we've got some more commissioning work to do at the end of that in July, it will probably take a couple months, and then roll straight into pipelay is our plan.

Okay. Thank you.

Marty, I didn't avoid your question about the return on capital. I think the return on capital on the systems, it is consistent with our corporate hurdle, which is mid teens return on capital or better.

Okay. Great. Thank you very much.

Our next question comes from the line of Joe Gibney with Capital One.

Cliff, a question for you on the Express. A lot of the Intrepid stacking I'm sure was an asset specific issue, but you referenced firming up a little bit more work for the Express in the fourth quarter when it gets back into the Gulf of Mexico. Has anything changed in your outlook for that particular asset as you look into next year. Is pipelay feel and look a little bit softer given your ascertations of the market and your decision of stacking the Intrepid. Just curious if you could comment about what you've got in the queue for the Express, perhaps near-term?

We're pretty bullish about the Express. It is in the North Sea right now doing some work. It will come back over here. It's got a pretty extensive backlog when it gets here. I think it's got basically the rest of the year we have maybe a 20 day hole or so to fill up. So we feel pretty good about the Express as far as utilization for next year. There is not a lot of those type assets in the Gulf here where we plan on using the vessel and it remains to be seen whether we take it back to an RC any next year or not.

John, just a question for you. Just want to clarify a little bit about your comments about Danny II production. You referenced in excess of 3,000 barrels in that per day and your previous figure was 3,600. Is that still attainable or are you going to hold judgment here until we can complete the well here by mid-August. Just trying to ascertain whether or not that is lower than initially expected or where we stand on that.

I don't think our rate projections on Danny II have changed yet. I was just being maybe a little more conservative until we actually get the lab results from the MDT samples that we took in the well. We don't have -- I mean we opened up one of the chambers and we know we had black oil in the chamber, so we know we have an oil well, but we don't know exactly what the gas -- the oil ratio is and the composition there yet. So I was just -- I don't think we've had anything else that would give us any change.

And last one for me, just to clarify the number of work class ROV additions. I thought it was six for the year. I don't know if that is still on track. I thought I heard reference to 10 for the year out of Owen. I just wanted to clarify what work class ROV additions 12 -- in '12 is. Is it six or is it 10.

I think what Owen was saying there was, his comment was that they have a full year of contribution in 2013 because they're staggered in. Some came in the end of last year. Some are coming in through this year. Some will come next year. So as they staggered in they are all going to have contribution for '13.

Fair enough. Thank you. I will turn it back.

Your next question comes from the line of Michael Marino with Stephens.

First question for Tony. I know it is a little early to ask about 2013 CapEx, but, Owen, you rattled off a bunch of things that you guys are pursuing and with, I guess, the conversion and then the new build, could you give us a little bit of insight into how much you kind of expect to spend on the contracting side, just maybe ballpark it for us, in 2013?

Well, we have no plans to buy another drillship at this time. So that won't be reflected in our CapEx guidance. We will spend a like amount in 2013 for the Q plus, as we will in 2012. I mean, we have a very scheduled payments to the shipyard on a Q plus. I would expect 2013 CapEx to be lower overall. And really a lot lower because of lower spending on oil and gas. Without the Wang well in 2013, without Danny II in 2013, we should expect a lot lower CapEx in total. So I think overall, you are going to see our capital spending lower in 2013.

What do you expect total cost for Wang and Danny II to be?

Round numbers, Johnny, $175 million.

Together, total.

Yes.

And then just as a follow-up for Owen, I guess previously you talked about the Caesar being a non core asset. Is that still the case? And maybe if that thing can prove up its capability in pipelay, you would look to divest that or what are you kind of thinking there?

I don't think that our aspirations with the Caesar have changed any. We still consider it non core to our proof of services that we offer. To the extent that we could find another home for it, we would be open to it.

Perfect, thanks.

Our next question comes from the line of Joshua Jayne with Simmons & Co.

First question on contracting services, gross margins were a little bit light from the dry docks. But with a number of them behind you for the year, how can we think about a progression for the back half of the year and can we get back to Q1 levels?

Josh, I think, certainly the dry docks weighed on our margins, both from a volume standpoint, plus we incurred incremental R&M expenditures associated with the Q4000 while she was in dry dock. So, I would expect at a minimum that our gross profit margins will increase in our contracting service business going forward, with the only counter balance to that being the Express, was probably our highest earning asset in Q2. It came off of a very successful project in Israel. It has a little bit of that in July. But it won't be as profitable in Q3 as it was in Q2. So that will be -- that will temper some of the increase in gross profit margins in Q3.

We got a -- with that vessel, we have a transit back across the Atlantic with it as well and we got to dry dock of the Enhancer.

The Enhancer dry dock should not be as prolonged as either of the dry docks in Q2, as she is a much newer vessel. So right now, we're not anticipating any surprises on the Well Enhancer, but you never know once you get into dry dock. But overall, I think to answer your question, that's a long answer to say we expect margins to go up.

Another one, just on floater rates in general, we've seen a number of positive deepwater fixtures in the Gulf for the past couple of weeks with some contracts extending out into 2016. Could you talk about how this frenze or optimism around the Q4000 and if pricing has continued to inch higher as you increase your backlog on that vessel?

I think the rates going up bode very well for our heavy Well Intervention assets. Just say that, Josh, period. It can only help.

And then last one on the balance sheet, does this acquisition lower the probability that you might take out some of your high yield debt at the beginning of next year? And could you just talk about sort of your plans for the balance sheet over the next couple of quarters?

Josh, I think that is a very perceptive question and I think the answer to that is we are less likely to call the high yield notes in early 2016 than we might have otherwise if we hadn't acquired the D534. The jury is out. But I think it is -- we're going to be less aggressive about doing that. I will just say that.

Okay.

Our next question comes from the line of [Anthony Gujel with Upstream].

Just one question. Do you see increased competition in the well P&A market? Could that be another driver for acquiring the Discoverer 534? And I ask also, particularly because I heard Diamond Offshore's call and they made reference to the P&A market in the Gulf, specifically mentioning the Ocean Saratoga.

I'm sure that the demand in the P&A market is going to create -- well, there is going to be more demand than what can currently be provided. So, yes, I do expect other competitive offerings to be in the market on the P&A side. I think it is important for us, we have long-term assets coming specifically targeting the heavy intervention side. A lot of our utilization has taken on our current assets by P&A, so it was important for us to have a P&A offering, both to free up near-term asset availability and to fill the market demand between now and when our new assets, the Q plus arrives.

Thank you.

There are no further questions at this time. I would now like to turn the call back to you for any further presentation or closing remarks.

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

This concludes today's conference call. You may now disconnect.