Helix Energy Solutions Group Inc (HLX) 2012 Q3 法說會逐字稿

Good morning. My name is Luisha and I will be your conference operator today. At this time I would like to welcome everyone to the review third quarter 2012 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator instructions)

As a reminder today's conference call is being recorded today, Tuesday, October 23.

I would now like to turn the conference over to Mr. Terrance Jamerson. Mr. Jamerson, you may begin.

Thanks. 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 Contracting Services; Johnny Edwards, Executive Vice President of Oil and Gas; Alisa Johnson, our General Counsel and Lloyd Hajdik, our SVP of Finance.

Hopefully, you all have had an opportunity to review our Press Release and 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 will make a statement regarding forward-looking information.

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 in 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 FCC rules the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation along with this presentation, the earnings press release, our annual report and a replay of this broadcast are available on our website.

Owen will now make some opening remarks.

Good morning, everyone. Let's move on to slide 5, which is a high-level summary of third quarter results. Quarter three's revenues decreased slightly from $347 million in Q2 to $336 million this quarter, with the decrease attributable to lower oil and gas revenues resulting from production disruptions associated with Hurricane Isaac, normal decline curves, as well as lower realized oil prices. On the other hand our Contracting Services revenues increased from Q2 as the Q4000 and Seawell returned to service for a full quarter off of their regulatory dry-dock's in the prior quarter. Robotics also posted a stronger quarter reflecting robust activity levels, particularly in the North Sea. I believe it is important to note that for the first time in many, many quarters, a significant majority of our overall EBITDA was generated by our Contracting Services business as opposed to our ENP business. This reflects the very strong markets where our rating in and the outlook for our Well Intervention Robotics business remains very strong.

On to slide 6 and 7. From an EPS perspective, Q3s earnings had a fair amount of noise, posted EPS of $0.14 was impacted by a variety of irregular items. First, we sold the Intrepid pipe lay vessel in Q3 for $14.5 million resulting in a pre-tax book loss of $12.9 million. As you may recall, the Intrepid was the vessel we elected to cold stack the prior quarter due to the lack of market visibility, along with the amount of expenditures that would have been required to maintain regulatory class certification. I'll talk some more about the divestiture of our entire pipe lay fleet which we announced last week. More in my closing remarks.

Second, we took an impairment charge of $4.4 million to reduce the book value of certain of our Australian Well Intervention assets that are being held for sale. We have decided to pare back the scope of operations in Australia where we've struggled to achieve consistently acceptable financial results. Third, we finally closed the book on our sole UK Oil and Gas property, Camelot. By completing the decommission activities and booking an additional pre-tax charge of $6 million associated with these activities. Last, Hurricane Isaac shut down our production in the Gulf of Mexico for all or part of 10 days in Q3 resulting in the deferral of approximately 130,000 barrels of oil equivalent with a pre-tax impact of $7.5 million. On an after tax basis the impact of these four items amounted to $0.21 per share. In addition to the above items, we flipped a $10.1 million non cash hedge gain in Q2, to a non cash hedge loss of $9.4 million non cash hedge loss in Q3, a near $20 million swing.

Our Oil and Gas production in the third quarter totaled 1.5 million barrels of oil equivalent, down from 1.7 million barrels of oil equivalent in Q2. Quarter three's production was affected by the previously-discussed impact of Hurricane Isaac as well as natural declines. We continue to benefit from a high majority of our production being oil, 72%. As well as oil sold at Louisiana light sweet prices, which is currently at a significant premium to West Texas intermediate prices. We realized $98.5 a barrel net of our oil hedge contracts in Q3. In addition, NGL production along with our natural gas hedge contracts allowed us to realize $5.69 per thousand cubic feet for our natural gas production in Q3.

From a balance sheet perspective our cash and liquidity levels remain strong. Cash decreased from $650 million at June 30 to $584 million at September 30, mainly owing to our acquisition of the Transocean D-534 drill ship, which we have renamed the H-534, for $85 million in August. We are in the process of converting this vessel to a Well Intervention asset. Our liquidity levels of more than $1 billion remains high.

I'll now turn it over to Cliff for an in-depth discussion of our Contracting Service results.

Okay. Thanks, Owen. Good morning. As you can see Contracting Services revenues improved quarter-over-quarter above approximately $11 million in the Seawell. And the Q4000 returned from dry-dock's, offsetting the well enhancer dry-dock in Q3. The benefit of having only one vessel in dry dock in third quarter versus two vessels in Q2 can also be seen in our gross profit improvement. Q3 profits were up 27% with 7% higher than gross profits in Q2. Collectively the third quarter utilization across all three business units in Contracting Services was at its highest level for the year. Both Well Intervention vessels that returned from dry-dock's in Q2, the Seawell and the Q4000, were at 100% utilization for the quarter. ROV and trencher support vessels were at near 40 utilization also at 98% for the quarter. And the Express and Caesar were at 93% utilization in Q3 on a combined basis.

On over to slide 10. Again, as I mentioned on the previous slide, the Q4000 was fully utilized in the third quarter. Her backlog now extends completely through the end of 2014 with customers interest remaining strong in the years beyond 2014. The Intervention Router System Number 2 was a significant contributor to Well Intervention profits for the quarter as well. As it was deployed off the Ocean Victory drill rig for 55 days in Q3. Conversion of our newly acquired drill ship, the Helix 534, remains on schedule as she is expected to enter the Gulf of Mexico in mid-2013. We are seeing strong customer interest in this vessel here in the gulf and is anticipating adding significant sign backlog in the near future.

In the North Sea, the Seawell was also fully utilized for the third quarter while the Well Enhancer was in dry-dock for a total of 52 days. The dry-dock was completed early this month and the Well Enhancer is now back in service. We continue to add 2013 backlog for both vessels which now extends at over 500 days next year between the two. As many of you are now aware we signed a long-term charter with a Scandi constructor vessel in Q3. We do not take over the control of the vessel until next year but already have over 75 days of backlog [of -- on this vessel] as we're expected to commence in the middle of 2013.

We'll move on to slide 11, under Robotics. We saw another great quarter for this business unit as strong utilization in both long-term charter and spot vessels in this business improved quarter-over-quarter. Our next trencher, the T1200, pictured to the right on the slide, successfully completed its first job in quarter three. We also placed two more ROVs in service in the third quarter, both ROVs were purchased earlier in 2012 and we are extremely excited about signing one of our road grill units to a multi-year agreement set to begin in January 2013, where it will be performing geo technical survey work. We plan to place two more ROVs in service in Q4. Both of those ROVs will be placed on our newest charter vessel, the Grand Canyon, which has finally entered our fleet this month.

On to slide 12. In Subsea Construction, the Express had another strong quarter with 94% utilization as she wrapped up a campaign in the North Sea and transited back to the Gulf of Mexico in September where it is currently working. The Caesar continued its accommodations work down in Mexico where she is remaining through until July of 2013. And last just a brief touch on the last two bullets here. Last week, we announced an agreement to sell all three of our pipe lay vessels, which Owen will be addressing in more detail in his closing remarks.

On to slide 13, I'll leave this slide [for telling you about] utilization for your reference. And with that I'll turn it over to Johnny for the Oil and Gas side.

Good morning. Please turn to slide 14. Slides 14 and 15 provide the financial highlights for Oil and Gas for the third quarter. Production and revenue for Q3, 2012 are lower than Q2 for Oil and Gas. The difference as Owen mentioned is production was mainly down from Hurricane Isaac about 130,000 barrels of oil equivalent and the revenue was further reduced by about $9 a barrel reduction in average realized oil price in the third quarter compared to Q2. Our production mix in Q3 remained 72% oil which is consistent with Q2.

Turning over to slide 15, our operating costs were $7 million higher in Q3, with the difference being the timing of the Cat Bond of $8 million in Q3. Most of the Cat Bond charge is allocated to Q3 which is the peak of the hurricane season. Looking forward, we are excited about the new oil discovery in our Danny II well in the Bushwood field. We currently are in the process of hooking up the Danny II and to the same flow line, which Danny I flows. We should have Danny II on production by the end of this week and we expect Danny II to produce over 3,000 barrels of oil equivalent per day net to ERT.

Also in the Bushwood field, the Nancy well, which was drilled in fourth quarter 2008 has been completed and is waiting to flow. First production from Nancy is now estimated for Q1 or the end of Q1 in 2013. This gas well will add over 2,000 barrels of oil equivalent net to ERT. The Phoenix field and the HP I, continue to produce very well in Q3. The HP I left the Phoenix field for eight days for Hurricane Isaac. The HP I returned to the field, picked up the Bowie and returned Phoenix to production. The drilling rig for the Wang well should arrive in the Phoenix field by the end of this week. The Wang well is an exploration well in the Phoenix field, targeting a separate fault block in the same sand which is currently producing in the existing wells. If successful, the Wang well will also add over 3,000 barrels of oil equivalent per day net to ERT.

Over to you, Lloyd.

Thanks, Johnny. Slide 16 updates our current commodity hedge positions for the fourth quarter of 2012 and the full year of 2013. For the remainder of this year, we have approximately 1.2 million barrels of oil equivalent hedged, which covers approximately 86% of our forecasted Q4 combined production. For the full year 2012, we will have hedged approximately 78% of our estimated combined oil and gas production of 6.6 million barrels of oil equivalent. We did not put any additional natural gas or crude oil hedges in place in the third quarter.

For 2013 we have hedges in place totaling approximately 3.7 million barrels of oil equivalent. In 2013 floor price for our oil hedges is just under $100 per barrel and for natural gas the floor price is slightly above $4.00 per MCF. Regarding our oil hedges, over 90% of our current hedges in place by volume for the fourth quarter of 2012 and 2013 are based on the Brent benchmark as there continues to be a significant spread between WTI and Brent. The differential in the third quarter between WTI and what we actually received for our Gulf of Mexico crude oil sales was approximately $10 per barrel.

Turning to slide 18, this slide profiles our current gross and net debt levels and liquidity position at September 30. Gross debt of $1.17 billion was essentially unchanged from June 30, while our net debt increased $58 million to $589 million. Our cash balances decreased from $650 million at June 30 to $584 million at September 30 as we deploy cash for current CapEx needs, namely the $85 million to purchase the Helix 534 from Transocean in August and for our ongoing new build semi-submersible, the Q5000. Our current net-debt-to-book capitalization ratio stands at 27% at September 30. Our liquidity position was a very robust $1.0 billion plus as of the end of the third quarter. Over to slide 19. This slide provides a current update on our overall debt maturity profile as of September 30. And it really has not been any significant changes in our debt positions since the end of June other than loan amortization totaling $10.3 million in the quarter.

Tony?

Thank you, Lloyd. I'm going to move over to slide 21. And, good morning, to everybody.

First of all, we are maintaining our EBITDA forecast for all of 2012 at greater than $600 million, despite the impact of Hurricane Isaac production disruption in Q3. Our Contracting Service business remains strong and we have very high vessel utilization levels for the remainder of 2012. In so far as the sale of the pipe lay assets go, there is really no 2012 impact forecasted for this pending transaction this year from an EBITDA perspective as the closing will take place estimated in February for the Express and July for the Caesar. The key variables impacting Q4 in addition to the commodity prices shown on the chart is the onset of production from Danny II on the schedule that Johnny outlined earlier which is sometime this week. We have lowered our production forecast for the entire year to 6.6 million barrels of oil equivalent reflecting in part the down time impact from Hurricane Isaac in Q3. Furthermore, we have adjusted our all in commodity price forecast to reflect a down tick in oil prices that we have seen since the end of quarter one and two. However, again, I want to emphasize our overall EBITDA guidance for 2012 remains intact.

Our Well Intervention vessels to continue to expand backlog in the Q4000 is now booking backlog through 2014, while the Seawell and Well Enhancer are nearly fully booked for 2013. Our total backlog for the Well Intervention business is now at historic levels, in excess of $500 million at the end of the quarter. Robotics continues to run at high activity levels, both for the oil field and the renewable energy markets. The Grand Canyon has now joined the ROV support vessel fleet. Our CapEx estimate for 2012 has now been lowered to $545 million as some of our previously anticipated CapEx spending has been pushed out to 2013. We have spent $340 million CapEx for the nine months and the remainder of the CapEx in 2012 is associated mainly with the Q5000 and the H534 conversion and the Wang exploratory well. You now see all the Caesar Express vessels in Q4 will result in an after tax impairment charge of $100 million in Q4 related to the Caesar.

I'll now skip slides 26 and 27 and leave them for your reference and I will turn the call back to Owen for closing remarks.

Thanks, Tony. We have an awful lot of positive things going on inside the Company right now. For some time now, we have made it clear that our strategic intent was to restore the focus of the Company to our Contracting Service business. With a specific focus on leveraging our strong market positions in Well Intervention and Robotics. The first step in this transition was to restore the financial strength in our balance sheet. Step two is to begin a deployment of capital into growing Well Intervention and Robotics. This can be seen with the addition of work class vehicles, the T1200 trencher, the Grand Canyon robotics support vessel, the H534 intervention vessel, the IRS number two, which is a rental intervention system, that we have. The charter of the Scandi constructor going into the North Sea market and initiation of the construction of the Q5000.

At the same time, we have continued to deploy capital to sustain our oil and gas production to yield significant positive free cash flow. Over time, as we generate cash and realize the new growth in well intervention and robotics, we have said that our intent is to divest of non core assets. This allows for effective reallocation of capital and simplifies the business model. Consistent with our stated strategy, last week, we announced the sale of all three of our pipe lay assets. This was not a strong market niche for us and our decision was to focus on our strength in Well Intervention and Robotics. The impairment realized in your Q4 will not be small but the price received is at a multiple of five times 2012 EBITDA levels and an even higher multiple when looking at the longer-term run rate that we would expect.

Similarly, we have down sized our operations in Australia, due to the difficulty in achieving consistent good financial returns. This creates a bit of noise in our reporting, but it should be taken as a positive indication of the execution of our longstanding strategy. The transformation of the Company is well underway and going quite well. We have good visibility and strong demand for all of our current Well Intervention Robotic assets, as well as those newly added or on the way. We see continuing to be asset-constrained, and will continue the transition of the Company by potentially adding assets and resources going forward. We are actually in the process of adding additional facilities, both in Houston and Aberdeen to accommodate this future growth. Our position of Well Intervention Robotics is strong and we are focused on the next steps.

With that, at this time we'll turn it back over for some questions.

(Operator instructions)

Your first question comes from the line of Jim Rollyson with Raymond James.

Good morning, guys.

Morning, Jim.

Owen, you sound pretty bullish on the marine side, especially on the Intervention. A couple of questions may be around that, - - for one, given the fact that you have continued to add backlog on to especially the Q4000 now through '14, as well as the Seawell and Express. Kind of curious about the -- or excuse me, Enhancer. Kind of curious about the pricing side of things. If the market's this strong, I presume that pricing or margin opportunities have continued to get a little bit better. So maybe talk about how we should think about margins over the course of the next couple of years of backlog. Are they kind of sloping upward and maybe what opportunities you have to further expand margins, given your asset-constrained comment?

I might let Cliff answer, because he is involved with the market from day-to-day. But let me just start out by saying that I think rates will go up. But having said that, I don't think that we are looking to be opportunistic. I think we are in for the long haul, and we want to serve our client base with a consistent level of performance at a good price. The market is still very competitive. I think our rates are going to be tied more to our corporate return hurdles based on return on capital. And but these are expensive assets and costs are increasing, so the rates will go up. But we are very mindful of the return on capital targets.

Yes, I agree with what you said there. Our intention is to fill the market that we are not able to do with our assets. Because, as you mentioned, we have quite a bit of backlog and our clients are hungry for more assets to fill that immediately, hence the 534 coming. And we are getting what we believe to be reasonable returns and set for ourselves internally to drive those rates. So we don't see a huge upturn in the rates. We're just trying to fill the market more than increase the rates.

And from being asset-constrained standpoint, should we expect, you mentioned looking at other opportunities -- should we be looking more for additional charter opportunities, or more 534-type opportunities, or more Q5000-type opportunities? Or is it all EBITDA?

Yes. But to put it in a better framework, we have spent, - - we have had a number of years here to really plan our strategy and look hard at this market. We have looked at a lot of the floating assets out there. Our moves with the 534 and the Scandi constructor, we are sort of picking the best of the best. I think it is our preference, long-term, to have new build purpose built dedicated specialty assets suited to the Well Intervention and Robotics market. So I think going-forward our bias will be on new build, versus picking up additional older vessels.

Makes sense. Last one for me, kind of switching gears, maybe not quite as exciting, but on the production side of things, obviously you guys had issues in the quarter with the hurricane as did everybody. But when I look back to, say the second quarter and you produced - - a little over almost 19,000 barrels a day. That is obviously fallen down in the third quarter because of the hurricanes. But starting off first part of October, with 14,000 a day run rate kind of works out to about a 25% decline rate in six months, or so.

Curious just how should we think about decline rates notwithstanding the new projects you have kind of outlaid what the production rates will be for those. But how do you guys think about decline rates? Or what we should model for your underlying decline rate? Is this normal declines or is this some other mechanical or geological issues that have caused that to fall off so quickly?

Yes, this is Johnny, Edwards. The Gulf of Mexico typical decline rate for oil without adding new projects, 25% is actually a good decline, typically it can be 30%, or more. But 25% - - kind of reflects oil projects which were 70% plus oil. So I think that is not a bad decline to model in short of the new projects that will be coming on stream.

But is that something we should model on an annual basis right? Not over a six month period?

Right. That is an annual 25% -- 25% to 30%.

Jim, I think if you go back to the end of last year, in our guidance, going-forward, we sort of talked about the decline here of lowering production for a period of time, until we had our new projects coming on stream. At which time we would expect to exceed our historic production levels for awhile. And I think that's still the case. I think it is shifting around a little bit just because of the timing of projects and availability of rigs. But I think that model is sort of what you are seeing play out.

Okay. Great. Thanks, guys.

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

Thanks, good morning. Owen, just a question on how we should think about longer-term margins in marine. Remove some of the lumpiness of pipeline out, certainly Robotics and Well Intervention are running at elevated levels. I know historically is kind of a low to mid 20% gross margin mind set inclusive of construction. Should we sort of more firmly view this as a high 20% as a better run rate going-forward now, given what you are seeing in the market?

Yes, certainly, Joe. I think you really have almost answered your question. We certainly see much higher margins in Well Intervention and Robotics than we do in Subsea Construction. So, absent Subsea Construction, you should see our margins trend upward, purely in Robotics and Well Intervention.

Okay. Along those lines I'm just curious. What could you break out possibly the pipe lay vessel contribution in terms of revenue, EBITDA, in this most recent completed quarter?

I'll just say that directionally, the Subsea Construction rents were down in Q3 and that is really a factor of Q2 being so good for Subsea Construction because of the express work in Israel and the North Sea. I think quarter four will trend a little bit downward as well for Subsea Construction. We don't have as high utilization forecasted. On the other hand, we expect Well Intervention to pick up in Q4 as the Well Enhancer comes back and we'll have all three vessels working. And we expect kind of a similar quarter if not a little down for Robotics, as we don't have as much visibility for spot market work in Q4 and some of that is seasonal. So, overall, I think you are going to see kind of roughly a similar quarter in quarter four for Contracting Services compared to Q3. In terms of the contribution of revenues, Subsea Construction contributed about 15% of our revenues in Contracting Services in Q3.

Helpful. And, Owen, just one for you strategically. Just kind of thoughts on kind of retaining the spool base, given the sale of some of the pipe lay assets and how that sits in providing of third party spooling services. Is it something you want to be in longer-term? Is it just highly accretive to margin mix? I just want to get your thoughts on that. If it still part of the piece of what you want to do on the marine side, going-forward?

I don't know that it plays that strong of a role, Joe, in the strategic framework of the Company. But having said that, there is a shortage of quality deep water port facilities in the Gulf of Mexico. Ours is arguably, one of the best. We do believe that there is a decent third party service to provide to the industry, in providing spooling for other contractors. I have sort of never understood why every contractor had to have their own spooling base. And then on top of that, I think there is other things, we have a lot of additional land down there so there is other uses we can put it to. Having said that, it is an appreciating asset and a quality asset that we don't mind holding on to.

Sure, understood. Last one, just modeling really the question for Tony, I'll turn it back. I didn't see it in the slide deck. I know it has become an increasingly minor piece of the business, but what was the equity income break down between I-Hub and Marco Polo this quarter? And was also just curious to get your thoughts on the ongoing G&A run rate, Tony?

Yes, we left it out of the slide presentation business. It is really about the same as last quarter, Joe, in terms of the contribution. And in terms of SG&A, I would expect it to not vary that much from Q3 levels on average.

Helpful. I appreciate it, I'll turn it back.

Your next question comes from the line of Martin Malloy with Johnson Rice.

Good morning. With all the moving parts on the marine side, with adding the 534 and the Scandia Constructor in it, removing the pipe lay vessels. Once these vessels that are being added, the two vessels, come into the fleet, can you give us an idea of maybe what mid cycle EBITDA and maybe a high and low cycle EBITDA might be for the fleet? Or for the Marine side?

I think I'm going to defer on that. I'm sorry but we are right in the middle of our budgeting process and I think we'll have a lot better answer for you once we complete the budgeting and look at what next year's actually going to look like.

And in addition they don't really get here until the middle of next year. You are looking at full cycle is what you are looking at?

Just full cycle, I think in the past you have talked about kind of a low, high and mid cycle EBITDA for the marine side. And just with all the moving parts, I was wondering if you might update that. But maybe it sounds like you all prefer to wait?

Yes, I think we prefer to wait. I would say that we expect the Q5000 to produce EBITDA equal to or better than the Q4000. We think the H534 will be priced at a level that is not that much different than the Q4000 and therefore should have pretty good EBITDA contribution. So, all in all, I think these assets will be nice contributors to EBITDA, once they get in the water and contributing. I'll just say that. So you can do a little bit of extrapolation from there.

The exception to that being the Scandi Constructor, because it is the charter.

Right.

It's a short-term asset.

There have been several transactions in the last two months, for ENP assets in the Gulf of Mexico. Are you seeing any renewed interest in your assets?

Marty, I would say that certainly a deal flow has picked up. And if I think it is promising, but we don't have anything specifically to say about the ENP business from the divestiture standpoint at this time.

Okay. Just one last question. The FTI, Edison Chouest announcement yesterday, is that a different market from what you are really targeting with your Well Intervention assets?

- - that is hot off the press, Marty, it is difficult for us to comment on it, because we are not sure what Edison Chouest vessel capability is to do well intervention. Not sure Edison Chouest has any vessels that can really do heavy well intervention. But they did sign a - -

They aren't always in the gulf anyway. They don't have anything with towers on it or anything for that yet. If I had to guess, I think they see a pretty strong market worldwide in some of the things we are doing, and it is a good chance for them to team up and start looking at this market. There has been a bunch of small end players in the gulf that have attempted it. Some done okay, some not done very well at all. I think it is a market everybody is kind of prying into a little bit now. But we are leaps and bounds ahead of everyone else in our assets and vessels.

Thank you.

Your next question comes from the line of Trey Stolz of IBERIA Capital Partners.

Hi, guys. I think Joe covered most of my questions on trying to decipher the pipe lay divestiture, going forward. But, I guess any thought on reporting those discontinued operations, going forward?

Hi, Trey, it is Lloyd. We are just going through the accounting on that right now. It hasn't been decided whether or not on the technical literature if it falls into discontinued ops.

All right. (multiple speakers) I'm sorry, go ahead.

Yes, because - - we obviously have the impairment charge that we take in the fourth quarter and then the gain on the express when it closes in Q1, so. We are still going through the accounting ramifications on that.

Okay, great. Maybe future stat oil bids might be on hold indefinitely. But are there any other well intervention projects either for NOCs or large independents that you are focused on in the near future?

Everything that we do, from the aspect of deciding to add assets is based on a lot of dialogue with our client base as to what they need and what their aspirations are. Having said that, - - a vast majority of the market out there, in the deep water is made up of operators with well head counts that are insufficient to support bankable contracts. So what we are really focused on is providing the industry with a fleet of capable assets and then rolling up the utilization, as we see it, based on dialogue that we are having ongoing.

Got you. As opposed to long-term contracts with an individual operator, going forward?

Yes. I think they are few and far between, and we have sort of got that T-shirt hanging in our closet with our experience -- on the disappointing experience with stat oil on the Cat B. So I think we are much better served, our shareholders are better served with maximizing our returns in the open market.

Great. That is it for me then. Thank you.

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

Good morning. Question on I guess the Robotics group. You guys mentioned working I guess an average of seven charter vessels during the quarter, which if memory serves me correctly, that is kind of on the high-end of what you normally do. I was curious if you could kind of, going forward, I guess you took the Grand Canyon into the fleet. Now, is the charter vessel number likely to stay around that seven number, creep up? Or what are you seeing in kind of the marketplace? And how do you plan on kind of approaching that market from a charter vessel standpoint over the next 18 months?

Typically, we have had four vessels on long-term charter and they are staggered in when we pick them up and when we can actually release them from the long-term charter. And then we fill the spot market with spot vessels. Right now, I think we have four long-term and four short-term vessels in the spot market, so eight vessels on hire today in that market. The majority of that work, historically, in the last couple of years, has been in the North Sea and maybe west Africa in the Med area.

But, [post Macondo] with the coming back in the US market as well, so we are going to be bringing a couple of vessels into the Gulf here, in fact one is on the way now. So from a long-term perspective, I think we'll probably remain at the four or five long-term charter vessels, but we'll probably be more aggressive on these spot vessels as we are now gone up to seven or eight, as you mentioned.

You see that market getting better I guess in the Gulf of Mexico? And even the North Sea maybe? With the wind farm stuff?

I think, hopefully, it is improving overtime in the Gulf of Mexico. And I think we are still a little bit a ways from what I would call any kind of a real up cycle. You can see the majors are doubling the fleet of drilling rigs, which usually means a year or so later, 18 months later, the tie-back work, which is -- our vessels used to do all the hook up and jewelry work and associated with the tie backs. So, yes, we see that market picking up in the Gulf. Not today, but slowly over time, over the next year, picking up.

Okay, thanks. That is helpful. Just a clarification on some comments made about the backlog for the Q4000, extending well into 2014 it sounds like. Does that include I guess with the D534 coming into the fleet, will that take some of the Q backlog? Or is that Q backlog just for the Q, and you've got other work for the D534?

No, it is not taking work from the Q. We are fully booked up there for a ways out in the future and on through 2014 on the Q. And even some going into 2015. But we fully expect to hit the ground running with the 534 when it gets there in the middle of next year and it is booked up for quite awhile as well.

Okay, great. Thanks, I'll turn it back.

Your next question comes from the line of Anthony Gugel with Upstream.

Yes, hi. Good morning. I just had a question about the Australian Well Intervention market. You mentioned margin constraints. I was just curious. Is it lower than anticipated levels of demand? Or is it competition? Or what led to your decision there as far as Australia?

It is inconsistency in the demand. It is not the competition issue. It's just that there is not enough consistent work to support the overhead that we had down there. We were getting two or three jobs a year, but they are not long enough to support the infrastructure that we had down there. So we decided to scale that operation way back. It's just not consistent work is the answer.

And is that something that can change down the road I suppose?

Of course it can change. Do I think it will change anytime soon? My opinion, probably not.

Okay. Thanks.

I would just add I think the market down there, the brighter market for us is on the larger developments and the intervention opportunities associated with that plus the cross work. I think that is, on a campaign basis, those larger projects are equally well served by our, either our North Sea or our Gulf of Mexico basis.

Thanks, Owen.

(Operator instructions)

There are no further audio questions at this time.

Okay. Everyone, thanks for joining us today. We very much appreciate your interest and participation and look forward to having you participate on our fourth-quarter call -- the fourth-quarter 2012 call in February of next year. Thank you.

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